Finance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, Part One: Multiple-Choice Questions (45 points)

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Finance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, 2010. Part One: Multiple-Choice Questions (45 points)"

Transcription

1 Finance 2 for IBA (30J201) F.Feriozzi Regular exam December 15 th, 2010 Question 1 Part One: Multiple-hoice Questions (45 points) Which of the following statements regarding the capital structure decision in perfect capital markets is false? A. Because investors can borrow or lend at the same interest rate as the firm, homemade leverage is a perfect substitute for the use of leverage by the firm. B. When investors use leverage in their own portfolios to adjust the leverage choice made by the firm, we say that they are using homemade leverage.. The value of the firm is determined by the present value of the cash flows from its current and future investments. D. The investor can re-create the payoffs of unlevered equity by borrowing and using the proceeds to purchase the equity of the firm. E. The future repayments that the firm must make on its debt are equal in value to the amount of the loan it receives up front. Question 2 Kroger Inc. has a corporate tax rate of 35% and currently has some leverage. onsider the following income statements for Kroger (figures are in $ Millions): Year Total Sales 60,553 56,434 53,791 ost of goods sold 45,565 42,140 39,637 Selling, general & admin expenses 11,688 12,191 11,575 Depreciation 1,265 1,256 1,209 Operating Income 2, ,370 Other Income EBIT 2, ,370 Interest expense Earnings before tax 1, Taxes (35%) Net Income The income that would be available to equity holders in 2006 if Kroger was not levered is closest to A. $1,525 million. B. $2,035 million.. $1,500 million. D. $1,325 million. E. $1,850 million. 1

2 Question 3 Assume that the only friction in capital markets is represented by corporate taxation. Keeping constant the leverage of a company, a reduction in its marginal tax rate would A. not affect its after-tax WA. B. result in a lower after-tax WA.. result in a higher after-tax WA. D. result in a lower cost of equity capital. E. result in a higher cost of equity capital. Question 4 Big Bang orp. (BBA) is a clothing retailer with a current share price of $10.00 and with 25 million shares outstanding. Suppose that BBA currently has no leverage and announces plans to lower the amount of corporate taxes it pays, by borrowing $100 million and using the proceeds to repurchase shares. Suppose that BBA pays corporate taxes of 35% and that shareholders expects the change in leverage to be permanent. Assume that capital markets are perfect except for the existence of corporate taxes and financial distress costs. If the price of BBA's stock rises to $10.85 per share following the announcement, then with $100 million of debt the present value of BBA's financial distress costs is closest to A. $21.25 million. B. $35.00 million.. $11.40 million. D. $24.50 million. E. $13.75 million. Question 5 onsider the following personal-tax rates: apital Ordinary Dividend Year Gains Rate Income Rate Rate % 40% 40% % 39% 39% % 35% 15% The effective dividend tax rate for a one-year individual investor in 2006 is closest to A. 20%. B. 0%.. 15%. D. 35%. E. -20%. Question 6 Which of the following statements regarding the alternative methods of capital budgeting with leverage is false? A. The APV method explicitly values the market imperfections and measures their contribution to value. B. We need to know the debt level to compute the APV, but with a constant debtequity ratio we need to know the project's value to compute the debt level. 2

3 . With the WA method we must compute the value of the interest tax shield and the unlevered value of the project with two separate valuations. D. Implementing the APV method with a constant debt-to-equity ratio requires solving for the project's debt and value simultaneously. E. The first step in the APV method is to calculate the value of free cash flows using the project's cost of capital if it were financed without leverage. Question 7 An option strategy in which you hold a long position in both a put and a call option on the same underlying stock and with the same strike price is called A. a strangle. B. portfolio insurance.. a butterfly spread. D. a straddle. E. a protective put. Question 8 Which of the following represents an arbitrage upper bound for the value of a put option? A. Its strike price. B. Its intrinsic value.. The value of the underlying stock. D. Its time value. E. None of the above. Question 9 The current price of KD Industries stock is $20. In each of the following 5 years, the stock price will either go up by 20% or go down by 20%. KD pays no dividends. The risk-free rate for all maturities is 5% and will remain constant. The risk-neutral probability that in two years KD stock will be below $19 is closest to A B D E Question 10 onsider a European option on an underlying stock. The delta of an option measures the change in the value of the option given a $1 change in the price of the underlying stock. Which of the following statements is true? A. The option delta is positive for both a call and a put option. B. The option delta is negative for both a call and a put option.. The option delta cannot be positive for a put option. D. The option delta cannot be positive for a call option. E. None of the above is true. 3

4 Question 11 onsider the following two statements regarding the real option to wait, which is available for many capital budgeting decisions. I. If there is a lot of uncertainty, the benefit of waiting is diminished. II. The smaller the cost of waiting, the less attractive the option to wait becomes. A. Statement I is correct, statement II is false. B. Statement I is false, statement II is correct.. Statement I is false, statement II is false. D. Statement I is correct, statement II is correct. Question 12 Which of the following characteristics of IPOs does not represent a puzzle to financial economists? A. The price at the end of the first trading day is often substantially higher than the IPO price. B. In many IPO deals, the underwriter has the option to issue more shares of stock, amounting to 15% of the original offer size, at the IPO offer price.. The costs of the IPO are very high. D. The long-run performance of a newly public company (three to five years from the date of issue) is poor. E. The number of issues is extremely cyclical. Question 13 Which of the following statements regarding sinking fund provisions is false? A. With a sinking fund, if a bond is trading at below its face value, because the bonds are repurchased at par the decision as to which bonds to repurchase is made by lottery. B. With a sinking fund, instead of repaying the entire principal balance on the maturity date, the company makes regular payments into a sinking fund administered by a trustee over the life of the bond.. Sinking fund provisions usually specify a minimum rate at which the issuer must contribute to the fund. D. Because the sinking fund allows the issuer to repurchase the bonds at par, the option to accelerate the payments is another form of call provision. E. In some cases, the sinking fund payments are not sufficient to retire the entire issue and the company must make a large payment on the maturity date. Question 14 The lease-equivalent loan is A. the loan that is required on the purchase of the asset that leaves the purchaser with the same obligations as the lessor would have. B. the loan on the purchase of the asset that makes the lessor indifferent between purchasing and leasing the asset.. the loan that is required on the purchase of the asset that leaves the purchaser with the same obligations as the lessee would have. 4

5 D. the loan on the purchase of the asset that makes the lessee indifferent between purchasing and leasing the asset. E. None of the above. Question 15 Sigma Manufacturing has earnings per share (EPS) of $3.00, a share price of $32, and 5 million shares outstanding. Sigma is considering buying Delta Industries, which has earnings per share of $2.50, a share price of $20, and 2 million shares outstanding. Sigma will pay for Delta by issuing new shares. There are no expected synergies from the transaction. Assume that Sigma pays no premium to acquire Delta. Sigma's price-earnings (P/E) ratio after the acquisition of Delta is closest to A. 8. B D. 11. E. 12 Question 1 Part Two: Open Questions (55 points) onsider a firm that is currently all-equity financed, and has assets in place worth $5 billion. Its current market share price is $25. The firm plans to borrow $1.5 billion and use these funds to repurchase shares. The firm s corporate tax rate is 40%, and it plans to keep its outstanding debt equal to $1.5 billion permanently. (a) What is the lowest share price that the firm can offer to existing shareholders and have them tender their shares? (5 points) (b) Assume now that for each tendered share the firm will offer a premium of $2.00 on top of the minimum acceptable share price computed in the previous point (a). What will the stock price be after the share repurchase in this case? (5 points) Question 2 A firm will be liquidated in one year and today its managers can choose one of two business strategies that both require no additional capital expenditures. The first strategy is risky and its cash flow in one year is forecasted to be $100 million with probability 0.8, $150 million with probability 0.1, and only $10 million with probability 0.1. The second strategy is instead riskless and will produce in one year a sure cash flow of $100 million. The risk of the first strategy is diversifiable and the yearly risk-free interest rate is 5%. Managers act in the interest of existing equity holders. (a) Assume that the firm has a required debt payment of $60 million maturing in one year. What strategy will managers choose? What is the strategy that maximizes the total value of the firm? (5 points) (b) How would your answers to point (a) change if the required debt payment were $40 million? (5 points) (c) Assume now that the required debt payment, due in one year, is $40 million. However, before choosing the business strategy, managers are considering the issue of a zero coupon bond maturing in one year which is junior with respect to existing debt (but of course senior with respect to equity). The proceeds would be used to immediately pay a special dividend to shareholders. ompute the dividend that could be paid to shareholders if the face value of the zero coupon bond were $20 million. Is 5

6 it in the interest of existing equity holders to issue this junior zero coupon bond? (5 points). Hint: Investors anticipate the business strategy that will be chosen by managers. Question 3 You are the FO of a chain of gourmet food stores. Your company is considering opening a new store in a recently renovated building in New York. If you don t sign the lease on the store today, someone else will, so you will not have the opportunity to open a store later. There is a clause in the lease that allows you to break the lease at no cost in two years. Including the lease payments, the new store will cost $15,000 per month to operate. Because the building has just reopened, you do not know what the pedestrain traffic will be. If your customers are mainly limited to morning and evening commuters, you expect to generate $10,000 per month in revenue in perpetuity (as far as the store is operated). If, however, the building becomes a tourist attraction, you believe that your revenues will be $25,000 per month in perpetuity (as far as the store is operated). You estimate there is a 50% probability that the building will become a tourist attraction. Immediately after the store is open, it will be obvious whether the building is a tourist attraction or not. The costs to set up the store will be $600,000. Assume that the risk-free rate is 6% per year and will remain constant over time. You also estimate that the risks involved in the project are perfectly diversifiable. (a) ompute the NPV of the project. (5 points) (b) What is the value of the option to break the lease at no cost in two years? (5 points) Hint: Remember that you are not forced to start the project if it has a negative NPV. (c) Assume now that you can negotiate an additional clause in the lease contract that gives you the opportunity to break the lease in one year by paying an earlycancellation fee. Notice that the fee would be paid in one year only in case of an early cancellation. In any case you retain the right to break the lease contract after two years at no cost. What is the maximum early-cancellation fee that you are willing to negotiate today for the option of walking away from the project in one year? (5 points) Question 4 The current market value of equity of Miller Stores, Inc., is $5 billion, and its debt value is $2.4 billion. Moreover, Miller s levered cost of equity is 9.5% and its debt cost of capital is 6%. Miller is investigating an investment project that would require a $125 million outlay today, and would produce annual EBIT of $16 million in perpetuity, starting one year from now. Assume that the project will not generate any tax-deductible depreciation, nor it will require any change in net working capital. Miller faces a 30% corporate tax rate. It intends to maintain its current debt-to-equity ratio over time with the new project. (a) alculate the NPV of the investment project using the WA method. (5 points) (b) Assume that Miller starts the project immediately. What is the value of the additional debt that Miller must issue today to keep its debt-to-equity ratio constant? (5 points) (c) Recalculate the NPV of the investment project using first the APV method and then the FTE method. (5 points) 6

7 Solutions Part 1: Multiple-hoice Questions 1 2 D D Year EBIT Total available to equity holders if no leverage = EBIT(1-0.35) , , E B D A A B A VU = $ million shares = $250 million Without financial distress costs we would have VL = VU + cb = $ ($100) = $285 million, and the share price would therefore be $285 / 25 million shares = $ Hence, financial distress cost are given by PV of financial distress costs = ($ $10.85) 25 million shares = $13.75 million d = 15%, g = 15% (one year) τ d τ d τ g = 1 τ g = Each year, the risk-neutral probability of a 20% increase can be obtained by solving 0.05 = (1 )( 0.20) that yields = For the stock price to be below $19 after two years, it must go down by 20% both in year one and in year two. The risk-neutral probability of this event is (1 )(1 ) = The number of shares that Sigma must issue is given by So the total number of shares in the new merged firm equals 5 million (existing Sigma shares) million new shares = 6.25 million shares. Total earnings for the merged firm = earnings from Sigma + earnings from Delta. Earnings from Sigma = EPS shares outstanding = $ million = $15 m Earnings from Delta = EPS shares outstanding = $ million = $5 m Total earnings = $15 + $5 = $20 million $20 million earnings $32 EPS merged firm = = $3.20, Post merger P/E = 6.25 million shares = 10 $3.20 7

8 Question 1 Part 2: Open Questions Outstanding shares are $5b/$25 = 200 million. After borrowing $1.5 billion and before repurchasing, the value of the firm is (a) 5(assets in place) + 1.5(cash) + (0.40)1.5(tax shield) = $7.1 billion. The value of equity is now = $5.6 billion, so that the fair value of a share before the repurchase is $5.6 billion / 200 million shares = $28. If the repurchase is realized at this price, the firm can buy back $1.5 billion / $28 per share = 53,571,428 shares, and there would be 200,000,000 53,571,428 = 146,428,572 share outstanding thereafter. The value of equity after the repurchase would be = = $4.1 billion, so that remaining shares would be worth $4.1 b / 146,428,572 = $28. Hence, $28.00 is the minimum acceptable price to realize the buyback. Assume the repurchase price is set to $30. The firm can bay back (b) $1.5 billion / $30 per share = 50 millionshares, and there are = 150 million share outstanding thereafter. The value of equity after the repurchase is = = $4.1 billion, so that remaining shares are worth $4.1 b / 150 m = $ Question 2 (a) With a due debt payment of $60 million, the cash flows in one year will be!!! learly, managers prefer the risky strategy as it makes equity worth more than the riskless strategy. However, the riskless strategy maximizes the total value of the firm. 8

9 With a due debt payment of $40 million, the cash flows in one year will be (b)!! "#! learly, managers prefer now the riskyless strategy, which also maximizes the total value of the firm. (c) With a due payment of $40 million and a zero coupon bond with face value of $20 million, the total due payment is as in point (a) and managers will choose the risky strategy. In this case the face value of $20 millions can only be paid with probability 0.9, i.e., if the total cash flow is either $100 million or $150 million. When instead the cash flow is $10 million it is used to partially repay senior debt holders. The amount of money that can be raised with the issue of the junior zero coupon bond is therefore /1.05 = $17.14 million. This is the special dividend that can be paid. The issue of the zero coupon bond is not in the interest of shareholders. In fact if the junior bond is not issued, with a due debt payment of $40 million the management will choose the riskless business strategy and the value of equity is $60 million in this case. If instead the zero coupon bond is issued, total debt payments amount to $60 million and the management will choose the risky strategy. The value of equity is $41 million in this case and they also receive a dividend of $17.14 million. The total value of shareholders portfolio (shares of stock plus cash) is therefore = $58.14 million which is smaller than the value of equity in the absence of the zero coupon bond. Question 3 (a) The monthly interest rate is 0.06/12 = The information about the project is as follows: Setup cost 600,000 Monthly operating costs 15,000 Monthly revenues 10,000 with probability ,000 with probability 0.5 With 50% probability monthly revenues are $25,000. In this case the option to walk away from the lease is not exercised. ash flows are then perpetual and the present value of the project is With 50% probability monthly revenues are $10,000. In this case the option to walk away from the lease is exercised. ash flows then only last for two years (i.e., 24 months) and the present value of the project is 9

10 We therefore have that. Without the option to walk away, cash flows are in any case perpetual (whether revenues turn out to be high or low). In this case we have (b) Hence, the project is not started if the contract does not include the option to break the lease after two years. This means that all the value comes from this right, that is, the value of the option to break the lease is $343,593. (c) Early cancellation is valuable when revenues are low. In this case the early cancellation option allows saving $5,000 of monthly losses for 12 months. The value of such savings is And this is the maximum early-cancellation fee that you are (should be) willing to pay. Question 4 (a) First, we need to obtain the after-tax WA as follows Using the WA method we then obtain! "##"$% (b) The amount of additional debt to raise today, say & ', equals the target debt-to-value ratio (2.4/7.4) times the present value of future FF. Hence we have & ' = (2.4/7.4)* = $46.68 million. To apply the APV method we need the pre-tax WA, that is given by (c) 10

11 ( Notice that the debt obtained in (b) is expected to be maintained in perpetuity as the project FFs are also a perpetuity. Hence, using the APV method we obtain )*! "##"$% Notice in particular that the yearly tax shields are discounted at the rate ( because with a constant debt-to-equity ratio the tax shields have the same risk as the FFs. Finally, to apply the FTE method we need to obtain the free cash flows to equity holders (FFE), which is obtained as follows: FFE = FF + Net Borrowing (1 τ c ) Interest Payments. Notice that Net borrowing is $46.68 million today and it is expected to be zero in the future. Yearly interest payments are clearly zero today and are expected to be 46.68(0.06) in the future. Hence we obtain Today: Future: FFE 0 = = $78.32 million FFE t = 16(1 0.30) (1 0.30)46.68(0.06) = $9.24 million. Finally, using the FTE method we obtain +,-.! "##"$% This confirms that the three methods are indeed equivalent. 11

Finance 2 for IBA (30J201) F. Feriozzi Re-sit exam June 18 th, 2012. Part One: Multiple-Choice Questions (45 points)

Finance 2 for IBA (30J201) F. Feriozzi Re-sit exam June 18 th, 2012. Part One: Multiple-Choice Questions (45 points) Finance 2 for IBA (30J201) F. Feriozzi Re-sit exam June 18 th, 2012 Part One: Multiple-Choice Questions (45 points) Question 1 Assume that capital markets are perfect. Which of the following statements

More information

Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011. Part One: Multiple-Choice Questions (45 points)

Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011. Part One: Multiple-Choice Questions (45 points) Question 1 Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, 2011 Part One: Multiple-Choice Questions (45 points) Assume that financial markets are perfect and that the market value of a levered

More information

GESTÃO 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 GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 2010-2011 Chapter 18 Capital Budgeting and Valuation with Leverage

More information

AFM 372 Fall 2007 Midterm Examination Friday, October 26. This exam has 11 pages including this page. A separate formula sheet will be provided.

AFM 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 information

Practice Exam (Solutions)

Practice 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 information

According to Modigliani-Miller Proposition II with corporate taxes, the value of levered equity is:

According to Modigliani-Miller 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 information

Use the table for the questions 18 and 19 below.

Use 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 default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 1 3 4 5 Price

More information

CHAPTER 18. Capital Budgeting and Valuation with Leverage. Chapter Synopsis

CHAPTER 18. Capital Budgeting and Valuation with Leverage. Chapter Synopsis CHAPTER 18 Capital Budgeting and Valuation with everage Chapter Synopsis 18.1 Overview of Key Concepts There are three discounted cash flow valuation methods: the weighted average cost of capital (WACC)

More information

FN2 Ron Muller 2007-08 MODULE 4: CAPITAL STRUCTURE QUESTION 1

FN2 Ron Muller 2007-08 MODULE 4: CAPITAL STRUCTURE QUESTION 1 MODULE 4: CAPITAL STRUCTURE QUESTION 1 Gadget Corp. manufactures gadgets. The average selling price of this finished product is $200 per unit. The variable cost for these units is $125. Gadget Corp. incurs

More information

CORPORATE FINANCE (28C00100)

CORPORATE FINANCE (28C00100) IMPORTANT The submitted exercise answers will be accepted only for those students that have successfully registered for the course lectures. (Please check the list on the course website to make sure your

More information

Midterm exam financiering/finance. <Front page>

Midterm exam financiering/finance. <Front page> Midterm exam financiering/finance Question 1 An agency problem can be alleviated by: A) requiring all organizations to be sole proprietorships. B) compensating managers in such a way that

More information

DUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #4 Prof. Simon Gervais Fall 2011 Term 2.

DUKE 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 information

GESTÃO 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 GESTÃO FINANCEIRA II PROBLEM SET 4 - SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 2010-2011 Chapter 12 Estimating the Cost of Capital 12-1. Suppose

More information

More Tutorial at Corporate Finance

More Tutorial at  Corporate Finance Corporate Finance Question 1. The cost of capital (8 points) St. Claire Enterprises is a levered firm. The equity cost of capital for St. Claire is 7%. The debt cost of capital for St. Claire is 2%. Assume

More information

DUKE 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. 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 information

University of Pennsylvania The Wharton School

University 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 information

EMBA in Management & Finance. Corporate Finance. Eric Jondeau

EMBA in Management & Finance. Corporate Finance. Eric Jondeau EMBA in Management & Finance Corporate Finance EMBA in Management & Finance Lecture 5: Capital Budgeting For the Levered Firm Prospectus Recall that there are three questions in corporate finance. The

More information

LECTURE 07. Cost of Capital Berk, De Marzo Chapter 14 and 15

LECTURE 07. Cost of Capital Berk, De Marzo Chapter 14 and 15 1 LECTURE 07 Cost of Capital Berk, De Marzo Chapter 14 and 15 2 Equity Versus Debt Financing Capital Structure: The relative proportions of debt, equity, and other securities that a firm has outstanding.

More information

CORPORATE FINANCE REVIEW FOR THIRD QUIZ. Aswath Damodaran

CORPORATE FINANCE REVIEW FOR THIRD QUIZ. Aswath Damodaran CORPORATE FINANCE REVIEW FOR THIRD QUIZ Aswath Damodaran Basic Skills Needed What is the trade off involved in the capital structure choice? Can you estimate the optimal debt ratio for a firm using the

More information

t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3

t = 1 2 3 1. Calculate the implied interest rates and graph the term structure of interest rates. t = 1 2 3 X t = 100 100 100 t = 1 2 3 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 = 1 2 3 P t = 0.95 0.9 0.85 1. Calculate

More information

Copyright 2009 Pearson Education Canada

Copyright 2009 Pearson Education Canada d) If Dorval calls in the outstanding bonds, a bondholder who currently owns bonds with $100,000 of face value will have to sell them back to the firm at face value. The bonds would be more valuable than

More information

Corporate Finance: Final Exam

Corporate 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. For partial credit, when discounting, please show the discount rate

More information

CHAPTER 8. Problems and Questions

CHAPTER 8. Problems and Questions CHAPTER 8 Problems and Questions 1. Plastico, a manufacturer of consumer plastic products, is evaluating its capital structure. The balance sheet of the company is as follows (in millions): Assets Liabilities

More information

SOLUTIONS. Practice questions. Multiple Choice

SOLUTIONS. 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 information

CHAPTER 8 INTEREST RATES AND BOND VALUATION

CHAPTER 8 INTEREST RATES AND BOND VALUATION CHAPTER 8 INTEREST RATES AND BOND VALUATION Solutions to Questions and Problems 1. The price of a pure discount (zero coupon) bond is the present value of the par value. Remember, even though there are

More information

Chapter 14 Capital Structure in a Perfect Market

Chapter 14 Capital Structure in a Perfect Market Chapter 14 Capital Structure in a Perfect Market 14-1. 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 information

CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis

CIS September 2012 Exam Diet. Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis CIS September 2012 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Corporate Finance (1 13) 1. Assume a firm issues N1 billion in debt

More information

Financial 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 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 information

Current Ratio: Current Assets / Current Liabilities. Measure of whether company has enough cash to cover immediate expenses

Current Ratio: Current Assets / Current Liabilities. Measure of whether company has enough cash to cover immediate expenses 1 Beta: a measure of a stock s volatility relative to the overall market (typically the S&P500 index is used as a proxy for the overall market ). The higher the beta, the more volatile the stock price.

More information

Copyright 2009 Pearson Education Canada

Copyright 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 high-risk projects, which usually have higher IRR due to their high-risk nature, and

More information

Test3. Pessimistic Most Likely Optimistic Total Revenues 30 50 65 Total Costs -25-20 -15

Test3. Pessimistic Most Likely Optimistic Total Revenues 30 50 65 Total Costs -25-20 -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 information

Chapter 17 Does Debt Policy Matter?

Chapter 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 all-equity firm D) I and III only

More information

Leverage and Capital Structure

Leverage and Capital Structure Leverage and Capital Structure Ross Chapter 16 Spring 2005 10.1 Leverage Financial Leverage Financial leverage is the use of fixed financial costs to magnify the effect of changes in EBIT on EPS. Fixed

More information

The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1

The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Chapter 17 Valuation and Capital Budgeting for the Levered Firm 17A-1 Appendix 17A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition

More information

BUS303. Study guide 2. Chapter 14

BUS303. Study guide 2. Chapter 14 BUS303 Study guide 2 Chapter 14 1. An efficient capital market is one in which: A. all securities that investors want are offered. B. all transactions are closed within 2 days. C. current prices reflect

More information

AFM 271 Practice Problem Set #1 Spring 2005

AFM 271 Practice Problem Set #1 Spring 2005 AFM 271 Practice Problem Set #1 Spring 2005 1. Text problems: Chapter 1 1, 3, 4 Chapter 2 5 Chapter 3 2, 6, 7 Chapter 4 2, 6, 12, 14, 16, 18, 20, 22, 24, 26, 30, 32, 34, 38, 40, 46, 48 Chapter 5 2, 4,

More information

The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction

The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction Chapter 18 Valuation and Capital Budgeting for the Levered Firm 18A-1 Appendix 18A The Adjusted Present Value Approach to Valuing Leveraged Buyouts 1 Introduction A leveraged buyout (LBO) is the acquisition

More information

MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the

MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the MBA Financial Management and Markets Spring 2011 Dr. A. Frank Thompson Due: February 28, 2011 Competency Exam 1 Directions: Please answer the following 33 questions designed to test your knowledge of the

More information

Corporate Finance. Slide 1 咨询热线 : 学习平台 : lms.finance365.com

Corporate Finance. Slide 1 咨询热线 : 学习平台 : lms.finance365.com Corporate Finance Capital Budgeting Cost of Capital Measures of Leverage Dividends and Share Repurchases Working capital management Corporate Governance of Listed Companies Slide 1 Capital Budgeting Slide

More information

CHAPTER 12 RISK, COST OF CAPITAL, AND CAPITAL BUDGETING

CHAPTER 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 information

Exam (Correction) Exercise 1: Market efficiency

Exam (Correction) Exercise 1: Market efficiency Executive MA Program Pr. Eric Jondeau orporate Finance Exam (orrection) Exercise 1: Market efficiency (10 points) Answer the following questions in a few lines. a) TransTrust orp. has changed how it accounts

More information

Chapter 7. component of the convertible can be estimated as =

Chapter 7. component of the convertible can be estimated as = Chapter 7 7-1 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 information

Valuating the levered firm. Ch. 18 Valuation and Capital Budgeting for the Levered Firm

Valuating the levered firm. Ch. 18 Valuation and Capital Budgeting for the Levered Firm Valuating the levered firm Ch. 18 Valuation and Capital Budgeting for the Levered Firm I. Introduction In a strict MM world, firms can analyze real investments as if they are all-equity-financed. Under

More information

Cost of Capital and Project Valuation

Cost 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 information

MBA 8230 Corporation Finance (Part II) Practice Final Exam #2

MBA 8230 Corporation Finance (Part II) Practice Final Exam #2 MBA 8230 Corporation Finance (Part II) Practice Final Exam #2 1. Which of the following input factors, if increased, would result in a decrease in the value of a call option? a. the volatility of the company's

More information

Valuating the levered firm

Valuating the levered firm Valuating the levered firm Valuation and Capital Budgeting for the Levered Firm 18-0 Introduction In a strict MM world, firms can analyze real investments as if they are all-equity-financed. Under MM assumptions,

More information

15 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.

15 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 risk-free 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 information

Principles of Corporate Finance

Principles 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 Martins-da-Rocha (FGV) Principles of Corporate Finance

More information

6. Debt Valuation and the Cost of Capital

6. Debt Valuation and the Cost of Capital 6. Debt Valuation and the Cost of Capital Introduction Firms rarely finance capital projects by equity alone. They utilise long and short term funds from a variety of sources at a variety of costs. No

More information

Economics 173B - Corporate Finance Fall 2016 Prof. Garey Ramey. Study Problems II

Economics 173B - Corporate Finance Fall 2016 Prof. Garey Ramey. Study Problems II Economics 173B - Corporate Finance Fall 2016 Prof. Garey Ramey Study Problems II Problem 4.1. Consider an outstanding bond issue having a coupon rate of 5% and a time to maturity of two years, with interest

More information

LECTURE 09. Valuation Berk, De Marzo Chapter 18

LECTURE 09. Valuation Berk, De Marzo Chapter 18 1 LECTURE 09 Valuation Berk, De Marzo Chapter 18 2 Overview of Key Concepts Assumptions in this chapter The project has average risk. The firm s debt-equity ratio is constant. Corporate taxes are the only

More information

Chapter 5: Valuation. Albert Banal-Estanol

Chapter 5: Valuation. Albert Banal-Estanol Corporate Finance Chapter 5: Valuation Company valuation Valuation methods: Based on comparables or multiples Discounting cash flows: Weighted average cost of capital (WACC) Adjusted present value Flow

More information

CHAPTER 3. Arbitrage and Financial Decision Making. Chapter Synopsis

CHAPTER 3. Arbitrage and Financial Decision Making. Chapter Synopsis CHAPTER 3 Arbitrage and Financial Decision Making Chapter Synopsis 3.1 Valuing Decisions When considering an investment opportunity, a financial manager must systematically compare the costs and benefits

More information

Financial Statement Analysis!

Financial Statement Analysis! Financial Statement Analysis! The raw data for investing Aswath Damodaran! 1! Questions we would like answered! Assets Liabilities What are the assets in place? How valuable are these assets? How risky

More information

EMBA in Management & Finance. Corporate Finance. Eric Jondeau

EMBA in Management & Finance. Corporate Finance. Eric Jondeau EMBA in Management & Finance Corporate Finance EMBA in Management & Finance Lecture 4: Capital Structure Limits to the Use of Debt Outline 1. Costs of Financial Distress 2. Description of Costs 3. Can

More information

Corporate Finance: Final Exam

Corporate 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 information

Source of Finance and their Relative Costs F. COST OF CAPITAL

Source of Finance and their Relative Costs F. COST OF CAPITAL F. COST OF CAPITAL 1. Source of Finance and their Relative Costs 2. Estimating the Cost of Equity 3. Estimating the Cost of Debt and Other Capital Instruments 4. Estimating the Overall Cost of Capital

More information

Chapter 16 Financial Distress, Managerial Incentives, and Information

Chapter 16 Financial Distress, Managerial Incentives, and Information Chapter 16 Financial Distress, Managerial Incentives, and Information 16-1. Gladstone Corporation is about to launch a new product. Depending on the success of the new product, Gladstone may have one of

More information

CIS September 2013 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Level 2

CIS September 2013 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Level 2 CIS September 2013 Exam Diet Examination Paper 2.2: Corporate Finance Equity Valuation and Analysis Fixed Income Valuation and Analysis Level 2 SECTION A: MULTIPLE CHOICE QUESTIONS Corporate Finance (1

More information

Paper F9. Financial Management. Friday 5 December 2014. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants

Paper F9. Financial Management. Friday 5 December 2014. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants Fundamentals Level Skills Module Financial Management Friday 5 ecember 2014 Time allowed Reading and planning: 15 minutes Writing: 3 hours This paper is divided into two sections: Section A ALL 20 questions

More information

Copyright 2009 Pearson Education Canada

Copyright 2009 Pearson Education Canada d) JBC could adopt a constant dividend payout percentage. Annual earnings would be multiplied by this percentage to identify total cash dividends for the year. Per-share dividends would be this total amount

More information

CHAPTER 17 CAPITAL STRUCTURE: LIMITS TO THE USE OF DEBT

CHAPTER 17 CAPITAL STRUCTURE: LIMITS TO THE USE OF DEBT CHAPTER 17 B- 1 CHAPTER 17 CAPITAL STRUCTURE: LIMITS TO THE USE OF DEBT Answers to Concepts Review and Critical Thinking Questions 1. Direct costs are potential legal and administrative costs. These are

More information

UCLA Anderson School of Management Daniel Andrei, Option Markets 232D, Fall MBA Final Exam. December 2012

UCLA Anderson School of Management Daniel Andrei, Option Markets 232D, Fall MBA Final Exam. December 2012 UCLA Anderson School of Management Daniel Andrei, Option Markets 232D, Fall 2012 MBA Final Exam December 2012 Your Name: Your Equiz.me email address: Your Signature: 1 This exam is open book, open notes.

More information

Chapter 15. Learning Objectives Principles Used in This Chapter 1.A Glance at Capital Structure Choices in Practice 2.Capital Structure Theory

Chapter 15. Learning Objectives Principles Used in This Chapter 1.A Glance at Capital Structure Choices in Practice 2.Capital Structure Theory Chapter 15 Capital Structure Policy Agenda Learning Objectives Principles Used in This Chapter 1.A Glance at Capital Structure Choices in Practice 2.Capital Structure Theory 3.Why Do Capital Structures

More information

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS

CHAPTER 5 HOW TO VALUE STOCKS AND BONDS CHAPTER 5 HOW TO VALUE STOCKS AND BONDS Answers to Concepts Review and Critical Thinking Questions 1. Bond issuers look at outstanding bonds of similar maturity and risk. The yields on such bonds are used

More information

FINANCIAL MANAGEMENT For M.Com /B.Com Part A Question & Answers INTRODUCTION TO FINANCIAL MANAGEMENT 1. What is financial management?

FINANCIAL MANAGEMENT For M.Com /B.Com Part A Question & Answers INTRODUCTION TO FINANCIAL MANAGEMENT 1. What is financial management? FINANCIAL MANAGEMENT For M.Com /B.Com Part A Question & Answers INTRODUCTION TO FINANCIAL MANAGEMENT 1. What is financial management? It is the application of planning and control functions of the finance

More information

CHAPTER 22 Options and Corporate Finance

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 information

1. Section A carries a total of 40 marks and each question in Section B carries a total of 20 marks.

1. Section A carries a total of 40 marks and each question in Section B carries a total of 20 marks. FACULTY OF COMMERCE DEPARTMENT OF FINANCE BACHELOR OF COMMERCE HONOURS DEGREE IN FINANCE PART II 2 ND SEMESTER FINAL EXAMINATION MAY 2011 CORPORATE FINANCE [CFI 2201] TIME ALLOWED : 3 HOURS INSTRUCTIONS

More information

Chapter 7. . 1. component of the convertible can be estimated as 1100-796.15 = 303.85.

Chapter 7. . 1. component of the convertible can be estimated as 1100-796.15 = 303.85. Chapter 7 7-1 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 information

Corporate 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) 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 information

If you ignore taxes in this problem and there is no debt outstanding: EPS = EBIT/shares outstanding = $14,000/2,500 = $5.60

If 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 information

ENTREPRENEURIAL FINANCE: Strategy Valuation and Deal Structure

ENTREPRENEURIAL 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 information

Review for Exam 1. Instructions: Please read carefully

Review for Exam 1. Instructions: Please read carefully Review for Exam 1 Instructions: Please read carefully The exam will have 20 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation

More information

Problem 1 Problem 2 Problem 3

Problem 1 Problem 2 Problem 3 Problem 1 (1) Book Value Debt/Equity Ratio = 2500/2500 = 100% Market Value of Equity = 50 million * $ 80 = $4,000 Market Value of Debt =.80 * 2500 = $2,000 Debt/Equity Ratio in market value terms = 2000/4000

More information

Fundamentals Level Skills Module, Paper F9

Fundamentals 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 information

CHAPTER 20: OPTIONS MARKETS: INTRODUCTION

CHAPTER 20: OPTIONS MARKETS: INTRODUCTION CHAPTER 20: OPTIONS MARKETS: INTRODUCTION 1. Cost Profit Call option, X = 95 12.20 10 2.20 Put option, X = 95 1.65 0 1.65 Call option, X = 105 4.70 0 4.70 Put option, X = 105 4.40 0 4.40 Call option, X

More information

CHAPTER 2 How to Calculate Present Values

CHAPTER 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 information

Direccio Financiera II

Direccio Financiera II Direccio Financiera II Year 2014-15 Degree/study: 2013-14- GRAU EMPRESARIAL Course: 3-4 Term: Third Number of ECTS credits: 5 Hours of student s dedication: 125 Language or languages of instruction: English

More information

Chapter 3 Insurance, Collars, and Other Strategies

Chapter 3 Insurance, Collars, and Other Strategies Chapter 3 Insurance, Collars, and Other Strategies Question 3.1. This question is a direct application of the Put-Call-Parity (equation (3.1)) of the textbook. Mimicking Table 3.1., we have: S&R Index

More information

Exam 1 Sample Questions

Exam 1 Sample Questions Exam 1 Sample Questions 1. Asset allocation refers to. A. the allocation of the investment portfolio across broad asset classes B. the analysis of the value of securities C. the choice of specific assets

More information

17.10 SUMMARY AND CONCLUSIONS. Chapter Review and Self-Test Problems

17.10 SUMMARY AND CONCLUSIONS. Chapter Review and Self-Test Problems 598 PART SIX Cost of Capital and Long-Term Financial Policy CONCEPT QUESTIONS 17.9a What is the APR? 17.9b What is the difference between liquidation and reorganization? 17.10 SUMMARY AND CONCLUSIONS The

More information

Review for Exam 1. Instructions: Please read carefully

Review 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 information

One Period Binomial Model

One Period Binomial Model FIN-40008 FINANCIAL INSTRUMENTS SPRING 2008 One Period Binomial Model These notes consider the one period binomial model to exactly price an option. We will consider three different methods of pricing

More information

Fundamental analysis

Fundamental analysis Fundamental analysis 2 June 2016 CERN Finance Club c.laner@cern.ch Introduction Let s cover the two main types of investment analysis used in traditional investing Today: Fundamental analysis Next time:

More information

Lecture 3: Put Options and Distribution-Free Results

Lecture 3: Put Options and Distribution-Free Results OPTIONS and FUTURES Lecture 3: Put Options and Distribution-Free Results Philip H. Dybvig Washington University in Saint Louis put options binomial valuation what are distribution-free results? option

More information

MM1 - The value of the firm is independent of its capital structure (the proportion of debt and equity used to finance the firm s operations).

MM1 - The value of the firm is independent of its capital structure (the proportion of debt and equity used to finance the firm s operations). Teaching Note Miller Modigliani Consider an economy for which the Efficient Market Hypothesis holds and in which all financial assets are possibly traded (abusing words we call this The Complete Markets

More information

INTERVIEWS - FINANCIAL MODELING

INTERVIEWS - FINANCIAL MODELING 420 W. 118th Street, Room 420 New York, NY 10027 P: 212-854-4613 F: 212-854-6190 www.sipa.columbia.edu/ocs INTERVIEWS - FINANCIAL MODELING Basic valuation concepts are among the most popular technical

More information

Chapter 14: Capital Structure in a Perfect Market

Chapter 14: Capital Structure in a Perfect Market Chapter 14: Capital Structure in a Perfect Market-1 Chapter 14: Capital Structure in a Perfect Market I. Overview 1. Capital structure: mix of debt and equity issued by the firm to fund its assets Leverage:

More information

Chapter 16 Debt-Equity Mix 1. Divido Corporation is an all-equity financed firm with a total market value of $100 million.

Chapter 16 Debt-Equity Mix 1. Divido Corporation is an all-equity financed firm with a total market value of $100 million. Chapter 16 Debt-Equity Mix 1. Divido Corporation is an all-equity financed firm with a total market value of $100 million. The company holds $10 million in cash-equivalents and has $90 million in other

More information

Lecture 4 Options & Option trading strategies

Lecture 4 Options & Option trading strategies Lecture 4 Options & Option trading strategies * Option strategies can be divided into three main categories: Taking a position in an option and the underlying asset; A spread which involved taking a position

More information

LECTURE- 4. Valuing stocks Berk, De Marzo Chapter 9

LECTURE- 4. Valuing stocks Berk, De Marzo Chapter 9 1 LECTURE- 4 Valuing stocks Berk, De Marzo Chapter 9 2 The Dividend Discount Model A One-Year Investor Potential Cash Flows Dividend Sale of Stock Timeline for One-Year Investor Since the cash flows are

More information

5Capital Structure II: Stockholder & Bondholder Conflicts

5Capital Structure II: Stockholder & Bondholder Conflicts 5Capital Structure II: Stockholder & Bondholder Conflicts Modigliani-Miller (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 information

Chapter 9 Parity and Other Option Relationships

Chapter 9 Parity and Other Option Relationships Chapter 9 Parity and Other Option Relationships Question 9.1. This problem requires the application of put-call-parity. We have: Question 9.2. P (35, 0.5) C (35, 0.5) e δt S 0 + e rt 35 P (35, 0.5) $2.27

More information

Cash Flow Analysis Venture Business Perspective

Cash Flow Analysis Venture Business Perspective Cash Flow Analysis Venture Business Perspective Cash Flow (CF) Analysis What is CF and how is determined? CF Operating CF Free CF Managing CF Cash Conversion Cyclical CF Break-even Valuing venture businesses

More information

CHAPTER 18 Dividend and Other Payouts

CHAPTER 18 Dividend and Other Payouts CHAPTER 18 Dividend and Other Payouts Multiple Choice Questions: I. DEFINITIONS DIVIDENDS a 1. Payments made out of a firm s earnings to its owners in the form of cash or stock are called: a. dividends.

More information

CHAPTER 15 Capital Structure: Basic Concepts

CHAPTER 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 information

The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts 1)

The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts 1) IE Aufgabe 4 The Adjusted-Present-Value Approach to Valuing Leveraged Buyouts 1) Introduction A leveraged buyout (LBO) is the acquisition by a small group of equity investors of a public or private company

More information

Chapter 1: The Modigliani-Miller Propositions, Taxes and Bankruptcy Costs

Chapter 1: The Modigliani-Miller Propositions, Taxes and Bankruptcy Costs Chapter 1: The Modigliani-Miller Propositions, Taxes and Bankruptcy Costs Corporate Finance - MSc in Finance (BGSE) Albert Banal-Estañol Universitat Pompeu Fabra and Barcelona GSE Albert Banal-Estañol

More information