The Managing Director of Silver Co, a company you work for, has asked you to provide an
Question:
The Managing Director of Silver Co, a company you work for, has asked you to provide an estimate of the discount rate that could be used in appraising a large capital project. You have ascertained the following:
The return on a stock market portfolio is expected to be12%
Silver's equity beta1.6
Treasury bill yield is8%
Silver Plc is all equity financed.
Requirement
a) Estimate the weighted average cost of capital using the following Capital Asset Pricing Model
CAPM formulaRs= Rf+(Rm- Rf)
b) The expected return on market index (Rm) has been revised upwards from 12% to 13% as a result of favourable tax legislation just announced. How would this affect the expected return on a Silver Co share assuming a beta of 1.3 (Assume risk free rate remains at 8%)
What does the beta indicate in relation to risk of this scenario?
c) From a finance perspective, explain the term systematic risk.
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta