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 formulaR_s= R_f+(R_m- R_f)

b) The expected return on market index (R_m) 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.