This question was the most popular of the option questions. In part (a) the question required candidates to determine an appropriate cost of capital for two projects in a new industry. Most candidates made a reasonably good attempt at determining the cost of capital, although few candidates were able to calculate the asset beta of other activities and therefore the component asset beta.

A small number of candidates used an average of equity and debt weightings, and where this was done correctly, appropriate credit was given. Many responses did not give reasons for the approach taken and thereby did not achieve some relatively easy marks.