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1. (a) Your boss wants to investigate the profitability of several projects the company is interested in. In particular, he wants to understand how a change in several economic variables at the same time (e.g., an increase in the interest rate coupled with a decrease in the unemployment rate) will affect the net present values of these projects. Suggest two approaches to project analysis and explain why they are suitable for this purpose. [4 marks] (b) On March 20, 2020, The Hong Kong and China Gas Company (provider of town gas in Hong Kong) announced that its annual stock dividend will be reduced from 10% (1 every 10 shares) to 5% (1 every 20 shares). Prior to this, the company had been paying a 10% stock dividend in most years for the last 20 years. Give two reasons on why its stock price plummeted after the announcement. [4 marks] (c) In the binomial tree approach to option valuation, one may construct a recombin- ing tree or a non-recombining tree. Give one advantage for each construction. [4 marks] (d) Describe two shortcomings in evaluating the risk of a single stock using its beta. [4 marks] [Total: 16 marks] 1. (a) Your boss wants to investigate the profitability of several projects the company is interested in. In particular, he wants to understand how a change in several economic variables at the same time (e.g., an increase in the interest rate coupled with a decrease in the unemployment rate) will affect the net present values of these projects. Suggest two approaches to project analysis and explain why they are suitable for this purpose. [4 marks] (b) On March 20, 2020, The Hong Kong and China Gas Company (provider of town gas in Hong Kong) announced that its annual stock dividend will be reduced from 10% (1 every 10 shares) to 5% (1 every 20 shares). Prior to this, the company had been paying a 10% stock dividend in most years for the last 20 years. Give two reasons on why its stock price plummeted after the announcement. [4 marks] (c) In the binomial tree approach to option valuation, one may construct a recombin- ing tree or a non-recombining tree. Give one advantage for each construction. [4 marks] (d) Describe two shortcomings in evaluating the risk of a single stock using its beta. [4 marks] [Total: 16 marks]