Finance



Item Name

What are the limitations of the results of a sensitivity analysis such as the one carried out in Example 6.1 (Greene plc)?

Mega Builders plc (Mega), a civil engineering contractor, has been invited to tender for a major contract. Work on the contract must start in January 20X6 and be completed by 31 December 20X7. The contract price will be receivable in three equal annual instalments, on 31 December 20X6, 20X7 and 20X8. Mega’s management has reason to believe that the client will probably not accept a tender price...

The management of Roach plc is currently assessing the possibility of manufacturing and selling a new product. Two possible approaches have been proposed. Approach A This involves making an immediate payment of £60,000 to buy a new machine. It is estimated that the machine can be used effectively for three years, at the end of which time it will be scrapped for zero proceeds. Approach B This...

What does the word ‘utility’ mean in the context of utility theory?

What is a risk-averse person? Are most of us risk-averse?

What is the difference between the ‘specific’ and ‘systematic’ risk of a project? Why might it be helpful to distinguish between these two?

When deducing the expected NPV of a project, you can: (a) Identify all possible outcomes (and their individual NPVs) and deduce the expected NPV from them; or (b) Deduce the expected value of each of the inputs and use these to deduce the expected NPV directly. What are the advantages and disadvantages of each of these two approaches?

Portfolio theory tends to define risky investments in terms of just two factors: expected returns and variance (or standard deviation) of those expected returns. What assumptions need to be made about investors and the expected investment returns (one assumption in each case) to justify this ‘two-factor’ approach? Are these assumptions justified in real life?

‘Recently, equity returns have been lower than the returns available from short-term government securities. Clearly, in such a period, the capital asset pricing model doesn’t work because equity returns are supposed to be more than the risk-free rate.’ Is this statement correct? Explain.

Penney Products plc has a manufacturing plant devoted exclusively to production of one of the business’s products, a toy known as Zapper. The product is produced only at this factory. Recently demand has declined owing, managers believe, to the product’s rather old-fashioned image. The lease on the factory is due to expire on 31 December 20X8, and the company’s management has identified two...