Reference no: EM132616662

Stuart Wang, 28 years old, has recently joined Smart Retailing Limited, an apparel retailing company with core markets in Asia. Its business has been growing rapidly in recently years, and the management is considering various plans to further grow its business and profits in the next few years. Smart Retailing offers mandatory provident fund scheme managed by Ability Investment Inc. to employees. Ability Investment provides introduction leaflets indicating different funds have different total risks, systematic risks and unsystematic risks. Stuart recognizes that the funds have very different asset compositions, historical returns and management fees. His reporting manager Henry Champion, a senior finance manager, advises him to invest in small-cap funds, however he notes that these funds have large performance volatilities and high management expenses.

(a) Explain why small-cap funds generally have higher volatilities in their returns than large-cap funds. Provide two reasons why Henry recommends these funds to Stuart.

(b) Distinguish the relationship between systematic risk, unsystematic risk and total risk.

(c) Discuss the appropriateness of using the company's weighted average cost of capital (WACC) to evaluate the business opportunities if the management decides to enter into financial technology business. Describe one approach to find the appropriate discount rate for this new business.

(d) Henry is studying a project that has equal cash inflow per year for a considerable period. Explain the relationship between this project's payback period and its internal rate of return (IRR).