Question

Question 1 Explain the meaning of Unsystematic risk clearly.

Question 2 Given a quarterly payment of $2,000 for the next 11 years, and an annual interest rate of 8%, calculate the future value.

Question 3 Bond P is a premium bond with a 7.2% coupon rate. The bond makes half-annual payments, have a YTM of 5.1% and have five years to maturity. What is the current yield for bond P? If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond P? Assume a face value of $5,000.

Question 4 Murrindindi Roofing Ltd is growing quickly. Dividends are expected to grow at a rate of 22% for the next four years, with the growth rate falling off to a constant 6% thereafter. If the required return is 11% and the company has just paid a $1.2 dividend, what is the current share price?

Question 5 Pets at Rest Company wants to set up a private pet cemetery business. According to the CFO, Barry Bark, business is ‘looking up’. As a result the pet cemetery project will provide a net cash inflow of $160,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 5% per year forever. The project requires an initial investment of $1,800,000.

If Pets at Rest requires a return of 15% on such undertakings, should the pet cemetery business be started on NPV basis?

Answer 1

Question 1 Explain the meaning of Unsystematic risk clearly.

We can describe unsystematic risk as the risk or uncertainty to the money which is invested in a specific company or sector or industry. It is also known as diversifiable risk or non-systematic risk. Entry of a new competitor, change in taxation or any other regulation affecting the industry, change in the management can be classified as unsystematic risk.

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