Unsystematic Risk – NBC Institute

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

Question

Xeco is considering a N15 million expansion to increase profit before interest and tax by 20%. Financial details for Xeco are as follows:

Item	Amount (N’000)
Profit before interest	13,040
Finance charges (interest)	(240)
Profit before tax	12,800
Taxation	(3,840)
Profit for the year	8,960

Financing Options:

Debt: Issue N15m in 8% loan notes, with each note at a nominal value of N100.
Equity: 1-for-4 rights issue at a 20% discount to current share price (N6.25/share). Xeco has 12 million shares outstanding.
Corporate tax rate: 30%.

Required:

a. Evaluate whether Xeco should finance the expansion with debt or equity. (10 Marks)
b. Explain the relationship between systematic and unsystematic risk. (5 Marks)
c. Discuss the assumptions made by the Capital Asset Pricing Model (CAPM). (5 Marks)

Answer

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Tags: CAPM, Debt Financing, Equity Financing, Rights Issue, Risk analysis, Systematic risk, Unsystematic Risk
Level: Level 3

Topic: Financial Risk Management
Series: NOV 2023

FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

Question

a. In the context of the selection and holding of investments, discuss each of the following scenarios:

i. An investor holding only one security needs to be concerned with the unsystematic risk of that security. (3 Marks)

ii. However, an investor who holds a number of securities should take account of total risk. (3 Marks)

iii. An investor should never add to a portfolio an investment that yields a return less than the market rate of return. (3 Marks)

b. The equity beta of KT Plc. is 1.2 and the equity alpha is 1.4. Explain the meaning and significance of these values to the company. (6 Marks)

(Total 15 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Alpha, Beta, Financial Analysis, Investment Risk, Portfolio Strategy, Risk Management, Systematic risk, Unsystematic Risk
Level: Level 3

Topic: Portfolio Management
Series: NOV 2017

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

Question

Xeco is considering a N15 million expansion to increase profit before interest and tax by 20%. Financial details for Xeco are as follows:

Item	Amount (N’000)
Profit before interest	13,040
Finance charges (interest)	(240)
Profit before tax	12,800
Taxation	(3,840)
Profit for the year	8,960

Financing Options:

Debt: Issue N15m in 8% loan notes, with each note at a nominal value of N100.
Equity: 1-for-4 rights issue at a 20% discount to current share price (N6.25/share). Xeco has 12 million shares outstanding.
Corporate tax rate: 30%.

Required:

a. Evaluate whether Xeco should finance the expansion with debt or equity. (10 Marks)
b. Explain the relationship between systematic and unsystematic risk. (5 Marks)
c. Discuss the assumptions made by the Capital Asset Pricing Model (CAPM). (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: CAPM, Debt Financing, Equity Financing, Rights Issue, Risk analysis, Systematic risk, Unsystematic Risk
Level: Level 3

Topic: Financial Risk Management
Series: NOV 2023

FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

Question

a. In the context of the selection and holding of investments, discuss each of the following scenarios:

i. An investor holding only one security needs to be concerned with the unsystematic risk of that security. (3 Marks)

ii. However, an investor who holds a number of securities should take account of total risk. (3 Marks)

iii. An investor should never add to a portfolio an investment that yields a return less than the market rate of return. (3 Marks)

b. The equity beta of KT Plc. is 1.2 and the equity alpha is 1.4. Explain the meaning and significance of these values to the company. (6 Marks)

(Total 15 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Alpha, Beta, Financial Analysis, Investment Risk, Portfolio Strategy, Risk Management, Systematic risk, Unsystematic Risk
Level: Level 3

Topic: Portfolio Management
Series: NOV 2017

Question Tag: Unsystematic Risk

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FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

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FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

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FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

You're reporting an error for "FM – Nov 2017 – L3 – Q7 – Portfolio Management"

FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management

Assess whether debt or equity financing is more suitable for a business expansion and discuss related financial concepts.

You're reporting an error for "FM – Nov 2023 – L3 – SB – Q4 – Financial Risk Management"

FM – Nov 2017 – L3 – Q7 – Portfolio Management

Evaluate investment risk in different portfolio scenarios and explain the implications of beta and alpha values for KT Plc’s equity.

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