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11 Cards in this Set
- Front
- Back
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Systematic risk |
All companies exposed regardless of market Cannot be eliminated through diversification Eg interest rate changes, recession |
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Unsystematic risk |
Affects a particular market of company. Can be eliminated through diversification by investing in random selection of securities Eg chairman resigns, strikes |
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Should a company diversify? |
Portfolio theory shows the only logical portfolio is a fully diversified one |
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Should a company diversify? |
Portfolio theory shows the only logical portfolio is a fully diversified one |
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Stock market reaction to diversification |
May not welcome as diversified companies usually trade at a discount Stock market might assume they don’t have expertise in new area |
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Stock market reaction to diversification |
May not welcome as diversified companies usually trade at a discount Stock market might assume they don’t have expertise in new area |
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Shareholder reaction to diversification |
If they already hold a well diverted portfolio then they will not welcome it as already diverse |
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If capital structure is not maintained then what alternative appraisal methods should be used? |
Use APV Appraise project as if only financed by equity to arrive at base NPV Adjust for the present value of the costs and benefits of the actual finance used including present value of tax shield used Use the de geared beta |
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Adv and disadv of equity finance |
Control issues due to dilution of ownership Dividend payouts are not tax deductible Expensive in comparison to debt finance High issue costs Gearing is reduced, improving the stability of equity earnings Reduction in SH financial risk |
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Adv and disadv of equity finance |
Control issues due to dilution of ownership Dividend payouts are not tax deductible Expensive in comparison to debt finance High issue costs Gearing is reduced, improving the stability of equity earnings Reduction in SH financial risk |
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Adv and disadv of debt finance |
Not cause dilution Interest payments are deductible for tax Debt has cheaper costs that equity Enhancement of EPS ((earnings-interest)x0.83) / share capital Increased gearing which may increase risk of bankruptcy and increased financial risk Increased cost of equity |
