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Appendix 2

37 A future project is expected to involve the following cash flows and certainty
equivalents:

Year Cash flow Certainty equivalent

0 (2,000,000) 1

1 1,800,000 0.95

2 1,500,000 0.90

The projects risk free discount factor is 6%.
The net present value (NPV) of the project is expected to be __________ .

38 Big Co operates an underground train system beneath a major city. The drivers
of the trains have decided to go on strike, protesting against new working hours
which involve shifts through the night so that trains can run 24 hours per day.

The strike is likely to last several days, since talks between management,
workers and unions have been difficult. Revenues for Big Co are currently zero
whilst the strike is operating.

The affect of the strike on Big Co is:

Select all that apply.

A A systematic risk

B An unsystematic risk

C A specific risk

D A market risk

39 Better Buys, a UK supermarket chain, has a cost of equity of 13%. The UK’s
market rate is 10% and it’s risk free rate is 6%.

Better Buys beta factor is:

A 0.57

B 1.50

C 1.75

D 2.15

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