Appendices

1
Appendices

• FIGURE A1.1 DIVERSIFICATION OF RISK
• FIGURE A1.2 CAPITAL ASSET PRICING MODEL
• FIGURE A1.3-4 EFFECTS OF CHANGING GEARING
• FIGURE A2.6 FACTORS AFFECTING THE VALUE OF AN
  OPTION
• FIGURE A3.1 DECLINING BASE CASE IN DCF ANALYSIS

2
FIGURE A1.1 DIVERSIFICATON OF RISK
Risk
Unique risk
Market risk
Number of companies in the portfolio
3
FIGURE A1.2 CAPITAL ASSET PRICING MODEL
Ke Rf ß(Rm Rf)
Required Return
Capital market line
Rm
(Rm Rf)
Rf
Market Risk, ß
0
ß 1
4
FIGURE A1.3-4 EFFECTS OF GEARING
WACC
Gearing
Ideal level of debt
Value of company
Gearing
5
WORKING INSIGHT A2.6 FACTORS INCREASING OPTION
VALUES
CALL PUT

• Exercise price of option
• Volatility of price of underlying asset
• Price of underlying asset
• Risk free rate
• Time to exercise

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FIGURE A3.1 DECLINING BASE CASE IN DCF ANALYSIS

Project cash flows
Incremental discounted cash flows from new project
A
B
0
Original base case
Declining base case
-