QUESTION 1 COST OF CAPITAL (15 marks) (A) Theoretical Questions (i) A firm's capital structure and its target capital structure proportions are

Assume that all operating revenues and expenses occur at the end of the year. Ignore income tax.

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Required:

1. (a) Use the net present value method to determine whether HR Industries should retain the old machine or acquire the new machine. The organisation's required rate of return is 12 percent.
2. (10 marks)
3. (b) Independent to your answer in (a), suppose the qualitative differences between the two alternatives are so slight that the management is indifferent between the two proposals. Identify and explain any qualitative factors the management should consider.
4. (5 marks)

QUESTION 3 RISK AND RETURN (30 marks) (A) Theoretical Questions

(i) Differentiate between systematic risk and non-systematic risk and why an investor should not expect to receive additional return for bearing non-systematic risk.

(Approx. 300 words) (10 marks) (ii) Describe the capital asset pricing model (CAPM) and its relationship to the

security market line (MSL).

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