t = Calculate the implied interest rates and graph the term structure of interest rates. t = X t = t = 1 2 3


 Candace Kelly
 1 years ago
 Views:
Transcription
1 MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] You are given the following prices P t today for receiving risk free payments t periods from now. t = P t = Calculate the implied interest rates and graph the term structure of interest rates. 2. Calculate the present value of the following cash flows: t = X t = Exercise 2. Arbitrage [4] You are given the following prices P t today for receiving risk free payments t periods from now. t = P t = There are traded securities that offer $1 at any future date, available at these prices. 1. How would you make a lot of money? Exercise 3. Bonds [4] You are given the following information about three bonds. Bond Year of Coupon Yield to Bond Maturity Maturity Price A 2 10% % 1, B 2 20% % 1, C 3 8% % Coupons are paid at the end of the year (including the year of maturity). All three bonds have a face value of 1,000 at maturity. 1. Find the time zero prices, P 1, P 2, and P 3, of one dollar to be delivered in years 1, 2, and 3, respectively. 2. Find the 1, 2, and 3 year spot rates of interest r 1, r 2 and r 3. Exercise 4. Stock [4] A stock has just paid a dividend of 10. ividends are expected to grow with 10% a year for the next 2 years. After that the company is expecting a constant growth of 2% a year. The required return on the stock is 10%. etermine todays stock price. Exercise 5. Projects [3] A project costs 100 today. The project has positive cash flows of 100 in years one and two. At the end of the life of the project there are large environmental costs resulting in a negative cash flow in year 3 of 95. etermine the internal rate(s) of return for the project. Exercise 6. CAPM [2] 1
2 The current risk free interest rate is 5%. The expected return on the market portfolio is 14%. What is the expected return of a stock with a beta value of 0.5? Exercise 7. Portfolio [2] Stock A has an expected return of 10% and a standard deviation of 5%. Stock B has an expected return of 15% and a standard deviation of 20%. The correlation between the two is shares is You can invest risk free at a 5% interest rate. What is the standard deviation for a portfolio with weights 25% in A, 25% in B and 50% in the risk free asset? Exercise 8. Q [2] Equity in the company Q has an expected return of 12%, a beta of 1.4 and a standard deviation of 20%. The current risk free interest is 10%. 1. What is the current expected market return? Exercise 9. Project [3] A project with a beta of 1.5 has cash flows 100 in year 1, 200 i year 3, 500 in year 4 and 100 in year 6. The current expected market return is 10%. The risk free interest rate is 5%. What is the highest cost that makes this project worth investing in? Exercise 10. Price [2] An asset has two possible values next period, X u = 50 and X d = 500. If you are told that the state price probability in the u state is 0.4 and the risk free interest rate is 10%, what is the value of the asset? Exercise 11. XYZ option [2] The current price of an American call option with exercise price 50, written on ZXY stock is 4. The current price of one ZXY stock is 56. How would you make a lot of money? Exercise 12. ud [1] The current price of the underlying is 50. This price will next period move to either 48 or 60. Find the constants u and d. Exercise 13. Call [5] You bought a call contract three weeks ago. The expiry date of the calls is five weeks from today. On that date, the price of the underlying stock will be either 120 or 95. The two states are equally likely to occur. Currently, the stock sells for 96. The exercise price of the call is 112. Each call gives you the right to buy 100 shares at the exercise price. You are able to borrow money at 10% per annum. What is the value of your call contract? Exercise 14. Bond Covenants [3] In one or two sentences, answer the following. 1. Who benefits from the covenants in bond contracts when the firm is in financial trouble? Why? 2. Who benefits from the covenants in bond contracts when the firm is issuing debt? Why? Exercise 15. [3] The Q corporation will next period realize a project that will have value either 100 or 20. This project is the only assets that Q corporation have. Q has issued a bond with face value of 50, due next period. The risk free interest rate is 10% and the current value of equity in Q is 40. etermine the current value of the bond. Exercise 16. Frisky [4] Frisky, Inc is financed entirely by common stock which is priced according to a 15% expected return. If the company repurchases 25% of the common stock and substitutes an equal value of debt, yielding 6%, what is the expected return on the common stock after the refinancing? 2
3 Exercise 17. Leverage [6] A firm has expected net operating income (X) of $600. Its value as an unlevered firm (V U ) is $2,000. The firm is facing a tax rate of 40%. Suppose the firm changes it ratio of debt to equity ratio to equal 1. The cost of debt capital in this situation is 10%. Use the MM propositions to: 1. Calculated the after tax cost of equity capital for both the levered and the unlevered firm. 2. Calculate the after tax weighed average cost of capital for each. 3. Why is the cost of equity capital higher for the levered firm, but the weighted average cost of capital lower? Exercise 18. Bond issue [4] An firm that is currently all equity is subject to a 30% corporate tax rate. The firm s equityholders require a 20% return. The firm s initial market value is $3,500,000, and it has 175,000 shares outstanding. Suppose the firm issues $1 million of bonds at 10% and uses the proceeds to repurchase common stock. Assume there is no change in the cost of financial distress for the firm. According to MM, what is the new market value of the equity of the firm? Exercise 19. Project [3] A company is considering a project with the following aftertax cashflows: t X t 150, , , , 000 If the project is all equity financed it has a required rate of return of 15%. To finance the project the firm issues a 4 year bond with face value of 100,000 and an interest rate of 5%. Remaining investments are financed by the firm s current operations. The company is facing a tax rate of 30%. etermine the NPV of the project. Exercise 20. Option [4] The current stock price is 160. Next period the price will be one of 150 or 175. The current risk free interest rate is 6%. You buy 1 stock and issue m call options on the stock with an exercise price of 155. What must be m be for the portfolio to be risk free? Exercise 21. LRC [3] You invest $100,000 in the Liana Rope Company. To make the investment, you borrowed $75,000 from a friend at a cost of 10%. You expect your equity investment to return 20%. There are no taxes. What would your return be if you did not use leverage? Exercise 22. Negative NPV? [3] o you agree or disagree with the following statement? Explain your answer. A firm s stockholders would never want the firm to invest in projects with negative NPV. Exercise 23. [1] In the equation, NPV = Cost + PV, the term "Cost" is the A) current value of the expected future cash flows today. B) current value of the terminal cash flow. C) initial cash outflow. ) present value of the variable costs. Exercise 24. [3] 3
4 Bradley Snapp has deposited $7,000 in a guaranteed investment account with a promised rate of 6% compounded annually. He plans to leave it there for 4 full years when he will make a down payment on a car after graduation. How much of a down payment will he be able to make? A) $1, B) $2, C) $8, ) $8, E) $9, Exercise 25. [5] What is the future value of investing $9,000 for 7 years at a continuously compounded rate of 11%? A) $15, B) $18, C) $19, ) $19, Exercise 26. [1] A pure discount bond A) does not have any face value. B) pays interest annually. C) pays interest semiannually. ) does not pay a coupon. Exercise 27. [1] The coupon of a bond is A) its time period to maturity. B) its current price. C) its face value. ) its yield to maturity. E) the amount of the interest payment. Exercise 28. [1] Zerocoupon bonds A) always sell at a discount before maturity. B) always sell at a premium before maturity. C) have no face value. ) have no maturity. E) Both B and C. Exercise 29. [3] The formula P o = IV/r represents A) the present value of dividends in perpetuity. B) the value of a no growth dividend stream. C) a lower value than if a growth element was included. ) All of the above. Exercise 30. [5] A stock you are interested in paid a dividend of $1 last year. The anticipated growth rate in dividends and earnings is 25% for the next 2 years before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of the stock. 4
5 A) $15.38 B) $20.50 C) $21.04 ) $22.27 E) $26.14 Exercise 31. [1] The internal rate of return may be defined as A) the discount rate that makes the NPV cash flows equal to zero. B) the difference between the market rate of interest and the NPV. C) the market rate of interest less the riskfree rate. ) the project acceptance rate set by management. Exercise 32. [3] The two fatal flaws of the internal rate of return rule are A) arbitrary determination of a discount rate and failure to consider initial expenditures. B) arbitrary determination of a discount rate and failure to correctly analyze mutually exclusive investment projects. C) arbitrary determination of a discount rate and the multiple rate of return problem. ) failure to consider initial expenditures and failure to correctly analyze mutually exclusive investment projects. E) failure to correctly analyze mutually exclusive investment projects and the multiple rate of return problem. Exercise 33. [1] Inflation is treated properly in NPV analysis by A) discounting nominal cash flows by a nominal discount rate. B) discounting real cash flows by a real discount rate. C) discounting nominal cash flows by a real discount rate. ) discounting real cash flows by a nominal discount rate. E) Both A and B. Exercise 34. [3] Nominal cash flows should be discounted at the A) true rate of interest. B) real rate of interest. C) inflation rate plus the nominal rate of interest. ) nominal rate of interest Exercise 35. [3] Viewing capital budgeting decisions as a series of options is useful to strategic analysis because A) contingent results may provide an option to bailout of a project with subsequent poor outcomes. B) the value of the project should be considered as the NPV plus the value of the option. C) strong markets and subsequent expansion options should be considered at time 0. ) All of the above. Exercise 36. [1] When stocks with the same expected return are combined into a portfolio A) the expected return of the portfolio is less than the weighted average expected return of the stocks. B) the expected return of the portfolio is greater than the weighted average expected return of the stocks. 5
6 C) the expected return of the portfolio is equal to the weighted average expected return of the stocks. ) there is no relationship between the expected return of the portfolio and the expected return of the stocks. Exercise 37. [3] For a highly diversified equally weighted portfolio with a large number of securities, the portfolio variance is A) the average covariance. B) the average expected value. C) the average variance. ) the weighted average expected value. E) the weighted average variance. Exercise 38. [1] A welldiversified portfolio has negligible A) expected return. B) systematic risk. C) unsystematic risk. ) variance. E) Both C and. Exercise 39. [3] A typical investor is assumed to be A) a fair gambler. B) a gambler. C) a single security holder. ) risk averse. E) risk neutral. Exercise 40. [1] Total risk can be divided into A) standard deviation and variance. B) standard deviation and covariance. C) portfolio risk and beta. ) systematic risk and unsystematic risk. E) portfolio risk and covariance. Exercise 41. [1] According to the CAPM A) the expected return on a security is negatively and nonlinearly related to the security s beta. B) the expected return on a security is negatively and linearly related to the security s beta. C) the expected return on a security is positively and linearly related to the security s variance. ) the expected return on a security is positively and nonlinearly related to the security s beta. E) the expected return on a security is positively and linearly related to the security s beta. Exercise 42. [3] If investors possess homogeneous expectations over all assets in the market portfolio, when riskless lending and borrowing is allowed, the market portfolio is defined to A) be the same portfolio of risky assets chosen by all investors. B) have the securities weighted by their market value proportions. C) be a diversified portfolio. ) All of the above. Exercise 43. [3] 6
7 The WACC is used to the expected cash flows when the firm has. A) discount; debt and equity in the capital structure B) discount; short term financing on the balance sheet C) increase; debt and equity in the capital structure ) decrease; short term financing on the balance sheet Exercise 44. [3] An industry is likely to have a low beta if the A) stream of revenues is stable and less volatile than the market. B) economy is in a recession. C) market for their goods is unaffected by the market cycle. ) Both A and B. E) Both A and C. Exercise 45. [3] If the efficient market hypothesis holds, investors should expect A) to earn only a normal return. B) to receive a fair price for their securities. C) always be able to pick stocks that will outperform the market averages. ) Both A and B. E) Both B and C. Exercise 46. [1] Event studies attempt to measure A) the influence of information release to the market on returns in days other than at announcement. B) if the market is at least semistrong efficient. C) whether there is a significant reaction to public announcements. ) All of the above. Exercise 47. [1] MM Proposition I without taxes is used to illustrate A) the value of an unlevered firm equals that of a levered firm. B) that one capital structure is as good as another. C) leverage does not affect the value of the firm. ) capital structure changes have no effect stockholder s welfare. E) All of the above. Exercise 48. [1] The difference between a market value balance sheet and a book value balance sheet is that a market value balance sheet A) places assets on the right hand side. B) places liabilities on the lefthand side. C) does not equate the right hand with the lefthand side. ) lists items in terms of market values, not historical costs. E) uses the market rate of return. Exercise 49. [3] MM Proposition I with corporate taxes states that A) capital structure can affect firm value. B) by raising the debttoequity ratio, the firm can lower its taxes and thereby increase its total value. C) firm value is maximized at an all debt capital structure. 7
8 ) All of the above. Exercise 50. [3] The change in firm value in the presence of corporate taxes only is: A) positive as equityholders face a lower effective tax rate. B) positive as equityholders gain the tax shield on the debt interest. C) negative because of the increased risk of default and fewer shares outstanding. ) negative because of a reduction of equity outstanding. Exercise 51. [3] Which capital budgeting tools, if properly used, will yield the same answer? A) WACC, IRR, and APV B) NPV, IRR, and APV C) NPV, APV and Flow to ebt ) NPV, APV and WACC E) APV, WACC, and Flow to Equity Exercise 52. [1] The special contractual nature giving the owner the right to buy or sell an asset at a fixed price on or before a given date is the basis of A) a common stock. B) a capital investment. C) a futures. ) an option. Exercise 53. [3] Which of the following is not true concerning call option writers? A) Writers promise to deliver shares if exercised by the buyer. B) The writer has the option to sell shares but not an obligation. C) The writer s liability is zero if the option expires outofthemoney. ) The writer receives a cash payment from the buyer at the time the option is purchased. E) The writer has a loss if the market price rises substantially above the exercise price. Exercise 54. [3] Which of the following statements is true? A) At expiration the maximum price of a call is the greater of (S T  Exercise) or 0. B) At expiration the maximum price of a call is the greater of (Exercise  S T ) or 0. C) At expiration the maximum price of a put is the greater of (S T  Exercise) or 0. ) At expiration the maximum price of a put is the greater of (Exercise  S T ) or 0. E) Both A and. Exercise 55. [1] PutCall parity can be used to show A) how far inthemoney put options can get. B) how far inthemoney call options can get. C) the precise relationship between put and call prices given equal exercise prices and equal expiration dates. ) that the value of a call option is always twice that of a put given equal exercise prices and equal expiration dates. E) that the value of a call option is always half that of a put given equal exercise prices and equal expiration dates. 8
9 Exercise 56. [3] The higher the exercise price A) the higher the call price. B) the lower the call price. C) has no effect on call price. ) the higher the stock price. E) the lower the stock price. Exercise 57. [1] If the volatility of the underlying asset decreases, then the A) value of the put option will increase, but the value of the call option will decrease. B) value of the put option will decrease, but the value of the call option will increase. C) value of both the put and call option will increase. ) value of both the put and call option will decrease. E) value of both the put and call option will remain the same. Exercise 58. [3] In terms of relating options to the value of the firm, the equity of the firm can be viewed as A) a call option on the firm with the exercise price equal to the promised payments to the bondholders. B) a call option on the firm with the exercise price equal to the firm s aftertax cash flow. C) a put option on the firm with the exercise price equal to the promised payments to the bondholders. ) a put option on the firm with an exercise price equal to the firm s aftertax cash flow. Exercise 59. [5] Verma Violin Manufacturing Corporation has issued debt with $10 million of principal due. In terms of viewing the equity of the firm as a call option, what happens to the equity of the firm if the cash flow of the firm is greater than $10 million? A) The option is inthemoney and the stockholders earn the difference between the cash flow and the bondholder s promised payment. B) The option is inthemoney and the bondholders earn the entire cash flow. C) The option is outofthemoney, the stockholders walk away, and the bondholders receive the entire cash flow. ) The option is outofthemoney, and the stockholders make up the difference so that the bondholders receive full payment. Exercise 60. [1] Suppose a firm in financial distress is bailed out by the Federal government by guaranteeing the payment on any new debt. If the firm issues new debt, who gains? A) Existing bondholder B) New bondholders C) Stockholders ) Both A and B. E) Both A and C. Exercise 61. [3] A firm in the extraction industry whose major assets are cash, equipment and a closed facility may appear to have extraordinary value. This value can be primarily attributed to A) the potential sale of the company. B) the low exercise price held by the shareholders. C) the option to open the facility when prices rise dramatically. 9
10 ) All of the above. Exercise 62. [3] The option to abandon is A) a real option. B) usually of little value because of the cost associated with abandonment. C) irrelevant in capital budgeting analysis. ) nearly always less relevant the option to expand. E) All of the above. Exercise 63. [3] uration of a pure discount bond A) is equal to its halflife. B) is less than a zero coupon bond. C) is equal to the liabilities hedged. ) equal to its maturity. 10
11 Empirical Solutions MØA 155 PROBLEM SET: Summarizing Exercise 1. Present Value [3] 1. The implied interest rates r t are found as: 2. The present value is found as P 1 = 0.95 = r 1 r 1 = = 5.26% ( ) 2 1 P 2 = 0.9 = 1 + r 2 1 r 2 = = 5.41% ( ) 3 1 P 3 = 0.85 = 1 + r 3 r 3 = = 5.57% P V = = 265 or alternatively, using interest rates, as ( ) ( ) 2 ( ) P V = Exercise 2. Arbitrage [4] 1. This data implies an arbitrage opportunity. Note that the price of the risk free security offering $1 in period 3 is higher than the price of the risk free security offering $1 in period 2. What does this mean? It means you have to pay less today for receiving money sooner! To make a lot of money, short the risk free security for period 3, and use $0.9 of the $0.95 proceeds to buy the period 2 risk free security. The $1 you get in period 2 can be kept as money and used to cover your obligation in period 3. For each of these transactions you get $0.05 now. To get very rich, do a lot of these transactions. Exercise 3. Bonds [4] Consider the the cash flows of the bonds and let B i be the price of bond i. Period Bond
12 1. Prices of one dollar to be received at times 1, 2 and 3: We use the following system to solve for these: We first use the prices of the first two bonds: B 1 = 100P P 2 B 2 = 200P P 2 B 3 = 80P P P 3 B 1 = 100P P 2 B 2 = 200P P 2 Multiply the first equation by 2 and subtract the second: Solve for P 2 : Use this to find P 1 : P 2 = Then find P 3 using the third bond price: 2. From these we find the spot rates of interest 2B 1 B 2 = 1000P B 1 = 100P P 2 = = 100P P 1 = B 3 = 80P P P = P 3 P 3 = P 1 = = r 1 r 1 = = 9.89% ( ) 2 1 P 2 = = 1 + r 2 1 r 2 = = 7.47% ( ) 3 1 P 3 = = 1 + r 3 r 3 = = 9.92% 12
13 Exercise 4. Stock [4] Exercise 5. Projects [3] 1 = 10(1.1) = 11 2 = 10(1.1) 2 = = 2 (1.02) = = P 2 = 3 r g = = P 0 = P = = = The following picture shows the NPV as a function of the interest rate, and illustrates the fact that there are two solutions y to the problem of solving 0 = y (1 + y) (1 + y) NPV interest Exercise 6. CAPM [2] E[r] = r f + (E[r m ] r f )β = ( )0.5 = 9.5% Exercise 7. Portfolio [2] Let r A be the return on stock A and r B the return on stock B. Since the return on the risk free asset is a constant, its variance equals zero, and its covariance with other assets is also zero, and we can calculate the portfolio variance as var = var(r A ) cov(r A, r B ) var(r B ) var(r A ) = =
14 var(r B ) = = 0.04 cov(r A, r B ) = = var(r p ) = σ(r p ) = var(r p )0.545 Exercise 8. Q [2] Exercise 9. Project [3] E[r m ] = E[r] r f β E[r] = r f + (E[r m ] r f )β + r f = First find the required rate of return for the project r = ( )1.5 = 12.5% The maximal cost equals the present value of the future cash flow. P V = Thus, the maximal cost is Exercise 10. Price [2] = 11.4% (1.125) (1.125) (1.125) 6 = value = 1 ( p u X u + p d X d) ( (1 0.4) 500) = 1 + r = Exercise 11. XYZ option [2] Buy the option for 4, exercise immediately paying 50 to get the stock, sell the stock for 56. Net proceeds = 2. Repeat indefinitely. Exercise 12. ud [1] Exercise 13. Call [5] Let us find the price of a call on one share. S u = 60 = us 0 = u50 u = = 1.2 d = =
15 S u = 120 S 0 = 96 S d = 95 Find u and d: u = = 1.25 d = = Then find p u. Need to find the risk free rate for a 5 week period, approximate as Then find terminal payoffs and calculate option price p u = The call on 100 shares is then worth r (1 + r) d u d = = C u = max( , 0) = 8 C d = max(95 112, 0) = 0 = C 0 = r (pu C u + (1 p u )C d ) = 1 ( ) = r = Exercise 14. Bond Covenants [3] 1. The covenants protect bondholders from managers acting in behalf of shareholders and undertaking inefficient investment proficiencies during the time of financial distress. 2. These benefit the stockholders by allowing them to borrow from the bondholders at a reduced interest rate. Exercise 15. [3] Can use the equity to determine implied probabilities. Value of equity in the various states. max(0, ) = max(0, 20 50) = 0 15
16 40 = r (pu 50 + (1 p u )0) 40 = pu 50 p u = = Then this p u is used to determine the bond value Bond payoffs: min(50, 100) = 50 B 0 min(50, 20) = 20 B 0 = (pu 50 + (1 p u )20) = Exercise 16. Frisky [4] r = r + (r r ) E r = ( ) 1 3 = 18% Exercise 17. Leverage [6] 1. Let us use the data for the unlevered firm to find r. We are given the (beforetax) operating income X. The value of the unlevered firm is r = V U = r = aftertax income r aftertax income V U X(1 τ) 600(1 0.4) = = 18% V U 2, 000 For the unlevered firm, this is also the cost of equity capital, r E = r = 18%. Use this to find the value of the levered firm. r E = r + (r r )(1 τ) E = ( )(1 0.4) 1 = 22.8%. 16
17 2. W ACC U = 18% W ACC L = 1 2 r E (1 τ)r = (1 0.4) = 14.4% 3. The equity is riskier, hence the return on equity for the levered firm is higher. The lower W ACC reflects the tax savings from the leverage. Exercise 18. Bond issue [4] Currently, the value of the firm is $3.5 million, the same as the value of equity. The repurchase of $1 million decreases the value of equity by $1 million, to 2,500 million. But this does not account for the tax shield of the new bond issue. If the bonds are perpetual, the value of the firm increases by 1 million τ, where τ is the tax rate. In this case τ = 30%. Thus the tax shield is 300,000, and the value of equity is 2.5 mill + 300,000 = 2,800,000. Exercise 19. Project [3] Without the tax advantage NP V = Annual interest tax shield: = 1500 PV of tax shield t = C t = ( ) ( ) ( ) 3 = t = C t = Project NPV is NP V = 1500 ( ) ( ) ( ) ( ) 4 = NP V = = 7682 Exercise 20. Option [4] S d mc d = S u mc u m = S d S u = = 1.25 C u C d 20 0 m = 1.25 Exercise 21. LRC [3] 17
18 The equity returns $5,000(=20% of 25,000); the loan requires $7,500 (=10% of $75,000). Hence, the investment returns in total $12,500, which is 12.5% on $100,000. The would be the return on investment if it were totally financed by equity. Exercise 22. Negative NPV? [3] If bonds are in place (the firm has collected the money), then shareholders may have the incentive to change projects, towards a more volatile one. This may even be a negative NPV project. Convenants, warrants and conversion rights attached to the bonds will keep shareholders from doing so. Exercise 23. [1] C Exercise 24. [3] Rationale: $7,000 (1.06) 4 = $8, Exercise 25. [5] Rationale: $9, 000(e. 11(7) ) 1 = $9, 000( ) = $19, Exercise 26. [1] Exercise 27. [1] E Exercise 28. [1] A Exercise 29. [3] Exercise 30. [5] C Rationale: Price = $1.00(1.25)/ $1.25(1.25)/ [$1.5625(1.05)/( )]/ = $21.04 Exercise 31. [1] A Exercise 32. [3] E Exercise 33. [1] E Exercise 34. [3] Exercise 35. [3] Exercise 36. [1] C Exercise 37. [3] A Exercise 38. [1] 18
19 C Exercise 39. [3] Exercise 40. [1] Exercise 41. [1] E Exercise 42. [3] Exercise 43. [3] A Exercise 44. [3] E Exercise 45. [3] Exercise 46. [1] Exercise 47. [1] E Exercise 48. [1] Exercise 49. [3] Exercise 50. [3] B Exercise 51. [3] E Exercise 52. [1] Exercise 53. [3] B Exercise 54. [3] E Exercise 55. [1] C Exercise 56. [3] B Exercise 57. [1] Exercise 58. [3] A Exercise 59. [5] 19
20 A Exercise 60. [1] E Exercise 61. [3] C Exercise 62. [3] A Exercise 63. [3] 20
CHAPTER 22 Options and Corporate Finance
CHAPTER 22 Options and Corporate Finance Multiple Choice Questions: I. DEFINITIONS OPTIONS a 1. A financial contract that gives its owner the right, but not the obligation, to buy or sell a specified asset
More informationDUKE UNIVERSITY Fuqua School of Business. FINANCE 351  CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2.
DUKE UNIVERSITY Fuqua School of Business FINANCE 351  CORPORATE FINANCE Problem Set #7 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%, and investors pay a tax
More informationTPPE17 Corporate Finance 1(5) SOLUTIONS REEXAMS 2014 II + III
TPPE17 Corporate Finance 1(5) SOLUTIONS REEXAMS 2014 II III Instructions 1. Only one problem should be treated on each sheet of paper and only one side of the sheet should be used. 2. The solutions folder
More informationTest3. Pessimistic Most Likely Optimistic Total Revenues 30 50 65 Total Costs 2520 15
Test3 1. The market value of Charcoal Corporation's common stock is $20 million, and the market value of its riskfree debt is $5 million. The beta of the company's common stock is 1.25, and the market
More informationFinance 2 for IBA (30J201) F. Feriozzi Resit exam June 18 th, 2012. Part One: MultipleChoice Questions (45 points)
Finance 2 for IBA (30J201) F. Feriozzi Resit exam June 18 th, 2012 Part One: MultipleChoice Questions (45 points) Question 1 Assume that capital markets are perfect. Which of the following statements
More information1 Pricing options using the Black Scholes formula
Lecture 9 Pricing options using the Black Scholes formula Exercise. Consider month options with exercise prices of K = 45. The variance of the underlying security is σ 2 = 0.20. The risk free interest
More informationIntroduction to Options. Derivatives
Introduction to Options Econ 422: Investment, Capital & Finance University of Washington Summer 2010 August 18, 2010 Derivatives A derivative is a security whose payoff or value depends on (is derived
More informationSAMPLE FACT EXAM (You must score 70% to successfully clear FACT)
SAMPLE FACT EXAM (You must score 70% to successfully clear FACT) 1. What is the present value (PV) of $100,000 received five years from now, assuming the interest rate is 8% per year? a. $600,000.00 b.
More informationLeverage. FINANCE 350 Global Financial Management. Professor Alon Brav Fuqua School of Business Duke University. Overview
Leverage FINANCE 35 Global Financial Management Professor Alon Brav Fuqua School of Business Duke University Overview Capital Structure does not matter! Modigliani & Miller propositions Implications for
More informationUse the table for the questions 18 and 19 below.
Use the table for the questions 18 and 19 below. The following table summarizes prices of various defaultfree zerocoupon bonds (expressed as a percentage of face value): Maturity (years) 1 3 4 5 Price
More informationDUKE UNIVERSITY Fuqua School of Business. FINANCE 351  CORPORATE FINANCE Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2.
DUK UNIRSITY Fuqua School of Business FINANC 351  CORPORAT FINANC Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Suppose the corporate tax rate is 40%. Consider a firm that earns $1,000
More informationFIN 3710. Final (Practice) Exam 05/23/06
FIN 3710 Investment Analysis Spring 2006 Zicklin School of Business Baruch College Professor Rui Yao FIN 3710 Final (Practice) Exam 05/23/06 NAME: (Please print your name here) PLEDGE: (Sign your name
More informationChapter 14 Capital Structure in a Perfect Market
Chapter 14 Capital Structure in a Perfect Market 141. Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required
More informationSolutions to Lectures on Corporate Finance, Second Edition. Peter Bossaerts and Bernt Arne Ødegaard
Solutions to Lectures on Corporate Finance, Second Edition Peter Bossaerts and Bernt Arne Ødegaard 2006 Contents 1 Finance 1 2 Axioms of modern corporate finance 2 3 On Value Additivity 3 4 On the Efficient
More informationFinancial Markets and Valuation  Tutorial 6: SOLUTIONS. Capital Structure and Cost of Funds
Financial Markets and Valuation  Tutorial 6: SOLUTIONS Capital Structure and Cost of Funds (*) denotes those problems to be covered in detail during the tutorial session (*) Problem 1. (Ross, Westerfield
More informationChapter 7: Capital Structure: An Overview of the Financing Decision
Chapter 7: Capital Structure: An Overview of the Financing Decision 1. Income bonds are similar to preferred stock in several ways. Payment of interest on income bonds depends on the availability of sufficient
More informationJeffrey F. Jaffe Spring Semester 2016 Corporate Finance FNCE 100 Syllabus, page 1. Spring 2016 Corporate Finance FNCE 100 Wharton School of Business
Corporate Finance FNCE 100 Syllabus, page 1 Spring 2016 Corporate Finance FNCE 100 Wharton School of Business Syllabus Course Description: This course provides an introduction to the theory, the methods,
More informationChapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.)
Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.) The primary focus of the next two chapters will be to examine the debt/equity choice by firms. In particular,
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS PROBLEM SETS 1. There is little hedging or speculative demand for cement futures, since cement prices are fairly stable and predictable. The trading activity necessary to support
More informationReview for Exam 2. Instructions: Please read carefully
Review for Exam 2 Instructions: Please read carefully The exam will have 25 multiple choice questions and 5 work problems You are not responsible for any topics that are not covered in the lecture note
More informationFinal Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator
University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights
More informationAFM 372 Fall 2007 Midterm Examination Friday, October 26. This exam has 11 pages including this page. A separate formula sheet will be provided.
Student name: Student number: Instructor: Alan Huang Duration: 2 hours AFM 372 Fall 2007 Midterm Examination Friday, October 26 This exam has 11 pages including this page. A separate formula sheet will
More informationCHAPTER 15 Capital Structure: Basic Concepts
Multiple Choice Questions: CHAPTER 15 Capital Structure: Basic Concepts I. DEFINITIONS HOMEMADE LEVERAGE a 1. The use of personal borrowing to change the overall amount of financial leverage to which an
More informationCAPITAL STRUCTURE [Chapter 15 and Chapter 16]
Capital Structure [CHAP. 15 & 16] 1 CAPITAL STRUCTURE [Chapter 15 and Chapter 16] CONTENTS I. Introduction II. Capital Structure & Firm Value WITHOUT Taxes III. Capital Structure & Firm Value WITH Corporate
More informationM.I.T. Spring 1999 Sloan School of Management 15.415. First Half Summary
M.I.T. Spring 1999 Sloan School of Management 15.415 First Half Summary Present Values Basic Idea: We should discount future cash flows. The appropriate discount rate is the opportunity cost of capital.
More informationChapter 17 Does Debt Policy Matter?
Chapter 17 Does Debt Policy Matter? Multiple Choice Questions 1. When a firm has no debt, then such a firm is known as: (I) an unlevered firm (II) a levered firm (III) an allequity firm D) I and III only
More informationSAMPLE MIDTERM QUESTIONS
SAMPLE MIDTERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,
More informationFinance 3130 Corporate Finiance Sample Final Exam Spring 2012
Finance 3130 Corporate Finiance Sample Final Exam Spring 2012 True/False Indicate whether the statement is true or falsewith A for true and B for false. 1. Interest paid by a corporation is a tax deduction
More informationCHAPTER 20. Financial Options. Chapter Synopsis
CHAPTER 20 Financial Options Chapter Synopsis 20.1 Option Basics A financial option gives its owner the right, but not the obligation, to buy or sell a financial asset at a fixed price on or until a specified
More informationCh. 18: Taxes + Bankruptcy cost
Ch. 18: Taxes + Bankruptcy cost If MM1 holds, then Financial Management has little (if any) impact on value of the firm: If markets are perfect, transaction cost (TAC) and bankruptcy cost are zero, no
More informationCash flow before tax 1,587 1,915 1,442 2,027 Tax at 28% (444) (536) (404) (568)
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2014 Answers 1 (a) Calculation of NPV Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales income 5,670 6,808 5,788 6,928 Variable
More informationAccording to ModiglianiMiller Proposition II with corporate taxes, the value of levered equity is:
Homework 2 1. A project has a NPV, assuming all equity financing, of $1.5 million. To finance the project, debt is issued with associated flotation costs of $60,000. The flotation costs can be amortized
More informationTHE FINANCING DECISIONS BY FIRMS: IMPACT OF CAPITAL STRUCTURE CHOICE ON VALUE
IX. THE FINANCING DECISIONS BY FIRMS: IMPACT OF CAPITAL STRUCTURE CHOICE ON VALUE The capital structure of a firm is defined to be the menu of the firm's liabilities (i.e, the "righthand side" of the
More informationPaper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants
Fundamentals Pilot Paper Skills module Financial Management Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper
More informationUniversity of Pennsylvania The Wharton School
University of Pennsylvania The Wharton School FNCE 100 PROBLEM SET #6 Fall Term 2005 A. Craig MacKinlay Capital Structure 1. The XYZ Co. is assessing its current capital structure and its implications
More informationCHAPTER II LITERATURE REVIEW
CHAPTER II LITERATURE REVIEW 2.1 Financial Ratios Analysis Financial ratios are important to analysts due to conquer the little meaning of typically numbers. Thus, ratios are intended to provide meaningful
More informationMidterm Exam:Answer Sheet
Econ 497 Barry W. Ickes Spring 2007 Midterm Exam:Answer Sheet 1. (25%) Consider a portfolio, c, comprised of a riskfree and risky asset, with returns given by r f and E(r p ), respectively. Let y be the
More informationThe cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction
The cost of capital A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction... 1 2. Determining the proportions of each source of capital that will be raised... 3 3. Estimating the marginal
More information( ) ( )( ) ( ) 2 ( ) 3. n n = 100 000 1+ 0.10 = 100 000 1.331 = 133100
Mariusz Próchniak Chair of Economics II Warsaw School of Economics CAPITAL BUDGETING Managerial Economics 1 2 1 Future value (FV) r annual interest rate B the amount of money held today Interest is compounded
More informationIf you ignore taxes in this problem and there is no debt outstanding: EPS = EBIT/shares outstanding = $14,000/2,500 = $5.60
Problems Relating to Capital Structure and Leverage 1. EBIT and Leverage Money Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes [EBIT] are projected
More informationCHAPTER 20. Hybrid Financing: Preferred Stock, Warrants, and Convertibles
CHAPTER 20 Hybrid Financing: Preferred Stock, Warrants, and Convertibles 1 Topics in Chapter Types of hybrid securities Preferred stock Warrants Convertibles Features and risk Cost of capital to issuers
More informationOptions Pricing. This is sometimes referred to as the intrinsic value of the option.
Options Pricing We will use the example of a call option in discussing the pricing issue. Later, we will turn our attention to the PutCall Parity Relationship. I. Preliminary Material Recall the payoff
More informationCost of Capital and Project Valuation
Cost of Capital and Project Valuation 1 Background Firm organization There are four types: sole proprietorships partnerships limited liability companies corporations Each organizational form has different
More information1. CFI Holdings is a conglomerate listed on the Zimbabwe Stock Exchange (ZSE) and has three operating divisions as follows:
NATIONAL UNIVERSITY OF SCIENCE AND TECHNOLOGY FACULTY OF COMMERCE DEPARTMENT OF FINANCE BACHELOR OF COMMERCE HONOURS DEGREE IN FINANCE PART II 2 ND SEMESTER FINAL EXAMINATION MAY 2005 CORPORATE FINANCE
More informationThe Tangent or Efficient Portfolio
The Tangent or Efficient Portfolio 1 2 Identifying the Tangent Portfolio Sharpe Ratio: Measures the ratio of rewardtovolatility provided by a portfolio Sharpe Ratio Portfolio Excess Return E[ RP ] r
More information11 Option. Payoffs and Option Strategies. Answers to Questions and Problems
11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various
More informationFinance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011. Part One: MultipleChoice Questions (45 points)
Question 1 Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011 Part One: MultipleChoice Questions (45 points) Assume that financial markets are perfect and that the market value of a levered
More informationCHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS
1 CHAPTER 11 INTRODUCTION TO SECURITY VALUATION TRUE/FALSE QUESTIONS (f) 1 The three step valuation process consists of 1) analysis of alternative economies and markets, 2) analysis of alternative industries
More informationChapter 7. component of the convertible can be estimated as =
Chapter 7 71 Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders
More information15 Solution 1.4: The dividend growth model says that! DIV1 = $6.00! k = 12.0%! g = 4.0% The expected stock price = P0 = $6 / (12% 4%) = $75.
1 The present value of the exercise price does not change in one hour if the riskfree rate does not change, so the change in call put is the change in the stock price. The change in call put is $4, so
More informationBF 6701 : Financial Management Comprehensive Examination Guideline
BF 6701 : Financial Management Comprehensive Examination Guideline 1) There will be 5 essay questions and 5 calculation questions to be completed in 1hour exam. 2) The topics included in those essay and
More information2. How is a fund manager motivated to behave with this type of renumeration package?
MØA 155 PROBLEM SET: Options Exercise 1. Arbitrage [2] In the discussions of some of the models in this course, we relied on the following type of argument: If two investment strategies have the same payoff
More informationCHAPTER 20: OPTIONS MARKETS: INTRODUCTION
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk
More informationCorporate Finance: Final Exam
Corporate Finance: Final Exam Answer all questions and show necessary work. Please be brief. This is an open books, open notes exam. 1. DayTop Inns is a publicly traded company, with 10 million shares
More informationFundamentals Level Skills Module, Paper F9
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2008 Answers 1 (a) Calculation of weighted average cost of capital (WACC) Cost of equity Cost of equity using capital asset
More informationCHAPTER 21: OPTION VALUATION
CHAPTER 21: OPTION VALUATION 1. Put values also must increase as the volatility of the underlying stock increases. We see this from the parity relation as follows: P = C + PV(X) S 0 + PV(Dividends). Given
More informationCHAPTER 21: OPTION VALUATION
CHAPTER 21: OPTION VALUATION PROBLEM SETS 1. The value of a put option also increases with the volatility of the stock. We see this from the putcall parity theorem as follows: P = C S + PV(X) + PV(Dividends)
More informationFinal Exam Practice Set and Solutions
FIN469 Investments Analysis Professor Michel A. Robe Final Exam Practice Set and Solutions What to do with this practice set? To help students prepare for the final exam, three practice sets with solutions
More informationContribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257)
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2012 Answers 1 (a) Calculation of net present value (NPV) As nominal aftertax cash flows are to be discounted, the nominal
More informationENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure
ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure Chapter 9 Valuation Questions and Problems 1. You are considering purchasing shares of DeltaCad Inc. for $40/share. Your analysis of the company
More informationGESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE
GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 20102011 Chapter 18 Capital Budgeting and Valuation with Leverage
More informationCHAPTER 2 How to Calculate Present Values
CHAPTER How to Calculate Present Values 0. Mr. Basset is buying a security worth $0,000 now, which is its present value. The unknown is the annual payment. Using the present value of an annuity formula,
More information5Capital Structure II: Stockholder & Bondholder Conflicts
5Capital Structure II: Stockholder & Bondholder Conflicts ModiglianiMiller (MM I) theorem If There are no taxes There are no bankruptcy costs The firm s investment policy is fixed Then The value of the
More informationChapter 20 Understanding Options
Chapter 20 Understanding Options Multiple Choice Questions 1. Firms regularly use the following to reduce risk: (I) Currency options (II) Interestrate options (III) Commodity options D) I, II, and III
More information1 (a) Net present value of investment in new machinery Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales income 6,084 6,327 6,580 6,844
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2013 Answers 1 (a) Net present value of investment in new machinery Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales income 6,084
More informationChapter 7. . 1. component of the convertible can be estimated as 1100796.15 = 303.85.
Chapter 7 71 Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders
More informationAnswers to Chapter Review and SelfTest Problems
CHAPTER 14 Options and Corporate Finance 483 minimum value of a convertible bond is given by its straight bond value or its conversion value, whichever is greater. 6. Many other corporate securities have
More informationFIN 432 Investment Analysis and Management Review Notes for Midterm Exam
FIN 432 Investment Analysis and Management Review Notes for Midterm Exam Chapter 1 1. Investment vs. investments 2. Real assets vs. financial assets 3. Investment process Investment policy, asset allocation,
More informationReview for Exam 1. Instructions: Please read carefully
Review for Exam 1 Instructions: Please read carefully The exam will have 21 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation
More informationOptions/1. Prof. Ian Giddy
Options/1 New York University Stern School of Business Options Prof. Ian Giddy New York University Options Puts and Calls PutCall Parity Combinations and Trading Strategies Valuation Hedging Options2
More informationFinance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, 2010. Part One: MultipleChoice Questions (45 points)
Finance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, 2010 Question 1 Part One: Multiplehoice Questions (45 points) Which of the following statements regarding the capital structure decision
More informationCHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING
CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING Answers to Concepts Review and Critical Thinking Questions 1. No. The cost of capital depends on the risk of the project, not the source of the money.
More informationSTUDENT CAN HAVE ONE LETTER SIZE FORMULA SHEET PREPARED BY STUDENT HIM/HERSELF. FINANCIAL CALCULATOR/TI83 OR THEIR EQUIVALENCES ARE ALLOWED.
Test IIIFINN3120090 Fall 2009 (2.5 PTS PER QUESTION. MAX 100 PTS) Type A Name ID PRINT YOUR NAME AND ID ON THE TEST, ANSWER SHEET AND FORMULA SHEET. TURN IN THE TEST, OPSCAN ANSWER SHEET AND FORMULA
More informationCopyright 2009 Pearson Education Canada
The consequence of failing to adjust the discount rate for the risk implicit in projects is that the firm will accept highrisk projects, which usually have higher IRR due to their highrisk nature, and
More informationCHAPTER 14 COST OF CAPITAL
CHAPTER 14 COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns more than this,
More informationThe Adjusted Present Value Approach to Valuing Leveraged Buyouts 1
Chapter 17 Valuation and Capital Budgeting for the Levered Firm 17A1 Appendix 17A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition
More information1. What is a recapitalization? Why is this considered a pure capital structure change?
CHAPTER 12 CONCEPT REVIEW QUESTIONS 1. What is a recapitalization? Why is this considered a pure capital structure change? Recapitalization is an alteration of a company s capital structure to change the
More informationThe Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction
Chapter 18 Valuation and Capital Budgeting for the Levered Firm 18A1 Appendix 18A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition
More informationMGT201 Solved MCQs(500) By
MGT201 Solved MCQs(500) By http://www.vustudents.net Why companies invest in projects with negative NPV? Because there is hidden value in each project Because there may be chance of rapid growth Because
More informationGESTÃO FINANCEIRA II PROBLEM SET 4  SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE
GESTÃO FINANCEIRA II PROBLEM SET 4  SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 20102011 Chapter 12 Estimating the Cost of Capital 121. Suppose
More informationChapter 11 Options. Main Issues. Introduction to Options. Use of Options. Properties of Option Prices. Valuation Models of Options.
Chapter 11 Options Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Part C Determination of riskadjusted discount rate. Part D Introduction to derivatives. Forwards
More informationPractice Exam (Solutions)
Practice Exam (Solutions) June 6, 2008 Course: Finance for AEO Length: 2 hours Lecturer: Paul Sengmüller Students are expected to conduct themselves properly during examinations and to obey any instructions
More informationSOLUTIONS. Practice questions. Multiple Choice
Practice questions Multiple Choice 1. XYZ has $25,000 of debt outstanding and a book value of equity of $25,000. The company has 10,000 shares outstanding and a stock price of $10. If the unlevered beta
More informationCorporate Finance, Fall 03 Exam #2 review questions (full solutions at end of document)
Corporate Finance, Fall 03 Exam #2 review questions (full solutions at end of document) 1. Portfolio risk & return. Idaho Slopes (IS) and Dakota Steppes (DS) are both seasonal businesses. IS is a downhill
More information1. What are the three types of business organizations? Define them
Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas
More informationChapter 3 Fixed Income Securities
Chapter 3 Fixed Income Securities Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Fixedincome securities. Stocks. Real assets (capital budgeting). Part C Determination
More informationFIN40008 FINANCIAL INSTRUMENTS SPRING 2008. Options
FIN40008 FINANCIAL INSTRUMENTS SPRING 2008 Options These notes describe the payoffs to European and American put and call options the socalled plain vanilla options. We consider the payoffs to these
More informationCHAPTER 17 Does Debt Policy Matter?
CHPTR 17 Does Debt Policy Matter? nswers to Practice Questions 1. a. The two firms have equal value; let represent the total value of the firm. Rosencrantz could buy one percent of Company B s equity and
More informationCost of Capital, Valuation and Strategic Financial Decision Making
Cost of Capital, Valuation and Strategic Financial Decision Making By Dr. Valerio Poti,  Examiner in Professional 2 Stage Strategic Corporate Finance The financial crisis that hit financial markets in
More informationGeneral Forex Glossary
General Forex Glossary A ADR American Depository Receipt Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, with the aim of creating profits without
More informationCHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM)
CHAPTER 10 RISK AND RETURN: THE CAPITAL ASSET PRICING MODEL (CAPM) Answers to Concepts Review and Critical Thinking Questions 1. Some of the risk in holding any asset is unique to the asset in question.
More informationPrinciples of Corporate Finance
Principles of Corporate Finance Chapter 18. Does debt policy matter? Ciclo Profissional 2 o Semestre / 2009 Graduaccão em Ciências Econômicas V. Filipe MartinsdaRocha (FGV) Principles of Corporate Finance
More informationCHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS 1. a. The closing price for the spot index was 1329.78. The dollar value of stocks is thus $250 1329.78 = $332,445. The closing futures price for the March contract was 1364.00,
More informationChapter 21: Options and Corporate Finance
Chapter 21: Options and Corporate Finance 21.1 a. An option is a contract which gives its owner the right to buy or sell an underlying asset at a fixed price on or before a given date. b. Exercise is the
More informationINVESTMENTS IN OFFSHORE OIL AND NATURAL GAS DEPOSITS IN ISRAEL: BASIC PRINCIPLES ROBERT S. PINDYCK
INVESTMENTS IN OFFSHORE OIL AND NATURAL GAS DEPOSITS IN ISRAEL: BASIC PRINCIPLES ROBERT S. PINDYCK Bank of TokyoMitsubishi Professor of Economics and Finance Sloan School of Management Massachusetts Institute
More informationYou just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?
1 You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each
More informationExecutive Summary of Finance 430 Professor VissingJørgensen Finance 43062/63/64, Winter 2011
Executive Summary of Finance 430 Professor VissingJørgensen Finance 43062/63/64, Winter 2011 Weekly Topics: 1. Present and Future Values, Annuities and Perpetuities 2. More on NPV 3. Capital Budgeting
More informationFinding the Right Financing Mix: The Capital Structure Decision. Aswath Damodaran 1
Finding the Right Financing Mix: The Capital Structure Decision Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate
More informationFutures Price d,f $ 0.65 = (1.05) (1.04)
24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding
More information