Some answers might be wrong! Calculate for yourself to double check!
1. Luther Industries is currently trading for $30 per share. The stock pays no dividends.
A one-year European put option on Luther with a strike price of $35 is currently
trading for $4.

Question 1
Warwick plc has an equity beta equal to 0.5 and a before-tax cost of debt equal to 5%.
Warwicks after-tax WACC is equal to 6%. The expected return of the market portfolio is
16%, the risk-free rate is 4%, and the corporate tax rate is 20%. What

Question 1
Scarman plc is considering investing in a new capital project that would cost
10,000 immediately. The project would generate the following after-tax
incremental cash flows in the subsequent years:
Year (from now)
Cash Flow at the year end
1
3,0

Question 1
If capital markets are efficient, then
a)
b)
c)
d)
e)
Investors should only buy bonds because stocks will always give a zero return.
Investors do not receive compensation for bearing risk because no one can Xbeat the
marketY.
Capital gains shou

Solutions
Question
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Version A
C
C
C
A
B
D
C
A
C
E
D
A
B
D
C
Version B
E
D
C
A
D
C
B
C
A
D
A
B
C
C
C
1
Version C
B
D
E
C
D
C
C
C
A
B
C
C
A
D
A
Question 1 of Version A, Question 14 of Version B, or Question 7 of Version C

W
SECTION A
(30 marks)
W
Question 1
Joanna has just graduated from Warwick and is carefully planning her future. Her calculations have
convinced her that she will need a lifetime income with a present value of 1 million to be able to
full all of her drea