theory for ch 7 - 8 Flashcards
what is systematic risk (also market risk)
a risk that influences a large number of stocks (also considered non diversifiable risk)
gives 2 examples of systematic risk
- interest rates
- change in gov leads to major policy change
- oil prices
what is non systematic risk
a risk that affects at most a small number of assets (unique asset)
2 examples of non systematic risk
an oil tanker ruptures, creating a large oil spill
CEO dismissed
a car manufactures closes its factory in aus
what does the beta represent
beta represents systematic risk in a particular asset relative to an average risky asset (in the market)
what does beta 1 represent
implies the asset has the same systematic risk as the overall market
beta greater than 1 represent
implies the asset has more systematic risk than the overall market
what is business risk
the risk of future net cash flows attributed to the nature of the companys operations.
what is financial risk
the additional risk borne by shareholders because of the use of debt as a source of finance
total risk
the total systematic risk of the firms equity (total business plus financial risk)
what is optimal capital structure
borrow up to the point where the tax benefit from an extra dollar in debt is exactly equal to the cost that comes from the increased probability of financial distress
topic 8
8
rights issue
is an issue of shares to existing shareholders in proportion to their existing shareholding where they have the right to purchase these shares at a lower subscription price than the market price.
share issue
raising of funds from the issue of ordinary shares directly to the public
primary market
a market for new issues of securities where the cash proceeds to go to the issuer of the security
