Question A3 a) Directors of ROPI Plc are currently considering several projects which will increase the range of the business activities undertaken by the company. The directors would like to use discounted cash flow techniques in their evaluation of these projects, but as yet no weighted average cost of capital has been calculated. ROPI Pic's capital structure and other information: Ordinary share capital (nominal value 0.50) 5% Preference share capital (nominal value 1). 10% Irredeemable debentures (nominal value 100) 000 500 300 200 Market value per ordinary share Market value per preference share Market value of debentures 2.5 2 105 The loan stock is irredeemable. The cost of the company's ordinary equity capital has been estimated at 8% per annum. The company is paying corporation tax at the rate of 20%. Calculate the weighted average cost of capital as required by the directors. (8 marks) b) Rachel owns shares of stock A and Stock B in her portfolio. The total value of her Stock A shares is 2,000. The total value of her Stock B share is 8,000. The table below shows the different states of the economy, the probabilities, and the returns for each stock, for the upcoming year. Probability Return on Stock A State of the economy Boom Normal Bust 30% Return on Stock B -18% 6% 18% - 4% 4% 10% 30% 40% Calculate the expected return on Stock A; the expected return on Rachel's portfolio; and the standard deviation of her portfolio. (11 marks) c) Explain the meaning of risk and briefly discuss the difference between systematic and unsystematic risk. Can both systematic and unsystematic risks be diversified? (6 marks) [25 marks in total] BEA 1010 4 Turn over