Part (b, ii) asked candidates to recognise that the second company was effectively offering a real put option when
offering to buy the project in two years.

Candidates were required to apply the Black-Scholes Option Pricing model to assess the value of the put option and the change in the value of the project as a result.

This part was done well by the majority of the candidates, but only a few candidates got the correct present value of the underlying asset.

Some candidates failed to recognise that this was a put option or that it was real option at all.

A small number of candidates were not able to determine N(d1) and N(d2) correctly, having obtained d1 and d2.

Part (b, iii) asked candidates to discuss the additional business risks and the assumptions made in calculating the amounts in (b, i) and (b, ii).

The majority of candidates were able to state some of the assumptions made but there was very little meaningful discussion of these.

The responses to additional business risks were patchy.

Some very good answers were given with a discussion of a range of business risks, which were contextualised to the scenario.

But equally, in a number of cases, business risks were mixed with financial risks, some business risks referred back to the scenario and were not additional, and often the risks were stated but again without any meaningful discussion.

In a number of cases the discussion tended to be general instead of being related to the scenario.

Four professional marks were available for the report for part (b). Many answers gained the majority of these marks, having a well-structured and neat answer, with good use made of appendices and presenting the answer in a report format.

However, as in June 2013, in December 2013, a significant number of scripts had poorly structured and disjointed answers.

Just having a title of ‘Report’ is not sufficient to gain any professional marks.

The layout, structure, presentation and neatness (including legibility) are the important factors.

Given that a number of scripts were awarded marks in the high 40s, gaining all the professional marks would have enabled these scripts to gain a pass mark.