1. a) Critically discuss whether the Capital Assets Pricing Model (CAPM) makes Portfolio Theory redundant. (7 marks)

2. b) Sino Hydro Plc is considering investing in a small hydropower project that will be financed by equity capital. In order to appraise the proposed investment, they want to calculate the cost of their equity capital. Their finance manager decides to use Capital Assets Pricing Model (CAPM) to estimate the cost of equity. The following information about the company and the market is collected:

   • The rate of return on UK treasury bills is currently 2.5%.

   • The correlation between the return of shares of Sino Hydro Plc and the

FTSE250 is +0.55.

Time Share price

1. T1 50.00

2. T2 55.00

3. T3 62.15

4. T4 71.47

5. T5 82.91

6. T6 98.66

FTSE250 index 1,100.00 1,188.00 1,318.68 1,476.92 1,654.15 1,902.27

Calculate the cost of equity capital of Sino Hydro Plc shares using CAPM.

(13 marks)

c) What is the difference between administration and reorganization? Briefly explain

the benefits of financial distress.

(5 marks)