Finance 2 for IBA (30J201) F.Feriozzi Resit exam June 14 th, Part One: Multiple-Choice Questions (45 points)
|
|
- Alexander McCarthy
- 7 years ago
- Views:
Transcription
1 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 firm's outstanding securities differs from the market value of an otherwise identical all-equity firm's outstanding securities. According to the logic of the first proposition by Modigliani and Miller, we can conclude that A. investors require "too low" an expected return on some of the levered firm's outstanding securities. B. investors are risk neutral. C. the market value of levered equity is given by capitalizing operating income at a rate equal to the firm's WACC. D. an arbitrage opportunity exists. E. investors are willing to pay a premium price for the shares of the unlevered firm. Question 2 A firm has $8.5 million in permanent debt, $20.5 million in equity, and a tax rate of 30%. Assume that the firm s cost of debt is 5.52%. Then, the firm's present value of the interest tax shields is closest to A. $1 million. B. $2.5 million. C. $3 million. D. $3.5 million. E. $4 million. Question 3 Which of the following statements regarding the use of leverage in the presence of corporate taxation is false? A. No corporate tax benefit arises from incurring interest payments that regularly exceed EBIT. B. The optimal level of leverage from a tax saving perspective is the level such that interest equals EBIT. C. If there is uncertainty regarding EBIT, then with a higher interest expense there is a greater risk that interest will exceed EBIT. D. If there is uncertainty regarding EBIT, then with a lower interest expense there is a lower risk that interest will exceed EBIT. E. To the extent that a firm has other tax shields, its taxable earnings will be increased and it will rely more heavily on the interest tax shield. Question 4 If the clientele effect is an important determinant of firms payout policy, we can conclude that A. investors are indifferent between dividends and capital gains. B. firms should pay out dividends only to those shareholders with a preference for future income over current income. 1
2 C. non-dividend-paying firms should be held by investors seeking capital gains. D. the dividend payout ratio should be set equal to the industry average. E. firms use their payout policy in an attempt to overcome asymmetric information problems with investors. Question 5 Consider the evaluation of a capital budgeting decision with leverage. To calculate the free cash flows that will be discounted using the WACC method, one can calculate the free cash flows that would accrue in the absence of any incremental debt financing (i.e., the unlevered free cash flows), and then A. subtract the incremental corporate taxes. B. add back the incremental tax shields. C. subtract the incremental interest payments. D. subtract the incremental principal and interest payments. E. none of the above. Question 6 Which of the following statements regarding financial options is true? A. The time value of a European call option on a non-dividend-paying stock can never be negative. B. The time value of a European call option on a non-dividend-paying stock can never be positive. C. The time value of a European call option on a dividend-paying stock can never be negative. D. The time value of a European call option on a dividend-paying stock can never be positive. E. The time value of American put and call options on a non-dividend-paying stock is always positive. Question 7 Sometimes managers are awarded stock options, i.e., call options on their company s stock. Managers who receive a great deal of pay in the form of stock options have the incentive not only to increase the price of the stock, but also to A. decrease the size of their business. B. decrease the stock price volatility. C. increase the size of their business. D. increase the stock price volatility. E. acquire firms in unrelated sectors. Question 8 Which of the following statements regarding the option to delay an investment opportunity is false? A. One way to see why it is sometimes optimal to choose not to invest in a positive-npv project is to think about the decision of when to invest as a choice between two mutually exclusive projects: (1) invest today or (2) wait. B. You invest today only when the NPV of investing today exceeds the value of the option of waiting, which from option pricing theory we know to be always nonnegative. C. When you do not have the option to wait, it is optimal to invest in any positive-npv project. 2
3 D. The option to wait is most valuable when there is not a great deal of uncertainty regarding what the value of the investment will be in the future. E. By delaying an investment, we can base our decision on additional information. Question 9 Which of the following statements regarding the value of financial options is true? A. Call options with lower strike prices are more valuable than otherwise identical calls with higher strike prices. Conversely, put options with higher strike prices are more valuable than otherwise identical puts with lower strike prices. B. Call options with higher strike prices are more valuable than otherwise identical calls with lower strike prices. Conversely, put options with lower strike prices are more valuable than otherwise identical puts with higher strike prices. C. Both call and put options increase in value when the price of the underlying stock increases. D. Both call and put options increase in value when the price of the underlying stock decreases. E. Call options increase in value, and put options decrease in value when the price of the underlying stock decreases. Question 10 Consider the following two statements regarding the concept of risk neutral probabilities. I. If all market participants were risk neutral, then the cost of capital of all financial assets (including options) would be the same and would be given by the risk free rate of interest. II. By using risk neutral probabilities we can price any derivative security that is, any security whose payoff depends solely on the prices of other marketed assets. A. Statement I is correct, statement II is false. B. Statement I is false, statement II is correct. C. Statement I is false, statement II is false. D. Statement I is correct, statement II is correct. Question 11 Which of the following statements is not true regarding Angel Investors? A. They are typically arranged as limited partnerships. B. For many start-ups, the first round of outside private equity financing is often obtained from them. C. Because their capital investment is often large relative to the amount of capital already in place at the firm, they typically receive a sizeable equity share in the business in return for their funds. D. These investors are frequently friends or acquaintances of the entrepreneur. E. Although in some cases the capital available from angel investors is sufficient, in most cases firms need more capital than what a few angels can provide. Question 12 Milton Industries sold 10 million shares of stock in an SEO. The market price of Milton s stock at the time was $25 per share. Of the 10 million shares sold, 6 million shares were primary shares being sold by the company, and the remaining 4 million shares were being sold by venture capitalists. Milton s underwriters charges 5% of the gross proceeds as an underwriting fee. The amount of money received by the venture capitalists is closest to A. $20 million. 3
4 B. $45 million. C. $75 million. D. $95 million. E. $125 million. Question 13 Callable bonds allow the issuing entity the opportunity to retire the issue prior to maturity. When is a bond most likely to be called? A. When the issuing entity has lower working capital. B. When market interest rates have decreased. C. When the issuing entity has excess cash. D. When the issuing entity has an excess of Treasury stock on the books that can be used to replace the callable bonds. E. When the issuing entity's bondholders are unhappy with the firm after interest rate increases. Question 14 A rights offering that gives existing target shareholders the right to buy shares in the target at a deeply discounted price if certain conditions are met is called a A. golden parachute. B. poison pill. C. proxy fight. D. white knight. E. sleeping beauty. Question 15 St. Martin's Hospital was offered the possibility to obtain a $2.5 million dollar CT scanner through a true tax lease involving up-front annual lease payments of $600,000 for five years. However, St. Martin decided to buy the CT scanner and to (partially) finance its acquisition with the lease equivalent loan. The CT scanner could be depreciated on a straight-line basis over five years, and was worthless thereafter. St. Martin s cost of debt is 8% and its tax rate is 35%. The amount that St. Martin could save at the time of the acquisition of the CT scanner by purchasing instead of leasing at the above conditions is closest to A. $20,000. B. $25,000. C. $30,000. D. $35,000. E. $40,000. Question 1 Part Two: Open Questions (55 points) Assume that capital markets are perfect. You are an entrepreneur starting a new biotechnology firm. If your research is successful, the technology can be sold for $45 million. If your research is unsuccessful, it will only be worth $5 million. To fund your research, you need to raise $6 million. Investors are willing to provide you with $6 million in initial capital in exchange for 25% of the unlevered equity in the firm. 4
5 (a) Compute the total market value of the firm without leverage, and the value of your share in the firm s equity. (5 points) (b) Assume you borrow $4 million. According to MM, what fraction of the firm s equity will you need to sell to raise the additional $2 million you need? Compute also in this case the total market value of the firm, and the value of your share in the firm s equity. (5 points) Question 2 Clark Industries has 150 million shares outstanding, a current share price of $45, and no debt. Clark s management believes that some of their long term assets are under-valued by the market and, as a result, the shares are under-priced. In particular, Clark s management believes that the true value of their long term assets would induce a share price of $50. Clark plans to pay $900 million in cash to its shareholders by repurchasing shares at the current market price of $45 per share. Suppose that soon after the transaction is completed, new information comes out that causes investors to revise their opinion of the firm and agree with management s assessment of Clark s value. (a) Compute the market capitalization, the number of outstanding shares, and the share price of Clark Industries before and after the share repurchase, as well as after the new information comes out. (5 points) (b) Assume now that Clark waited until after the new information come out to repurchase the shares, so that the repurchase could only be realized at the price of $50 per share. Compute the market capitalization, the number of outstanding shares, and the share price, before and after the share repurchase. (5 points) Question 3 Consider the following information about Lintner Industries: Lintner Industries' Market Value Balance Sheet ($ Millions) and Cost of Capital Cost of Assets Liabilities Capital Cash 0 Debt 300 Debt 5.50% Other Assets 700 Equity 400 Equity 11.50% c 30% Lintner Industries has available a new project whose free cash flows are as follows: Lintner Industries New Project Free Cash Flows Year Free Cash Flows ($120) $70 $60 $30 Free cash flows are zero beyond year 3. Assume that this new project is of average risk for Lintner, and that the firm wants to hold constant its debt-to-equity ratio. (a) Calculate the interest tax shield provided by Lintner s new project in year 1, 2, and 3. (10 points) (b) Calculate the present value of the interest tax shields obtained in point a). (5 points) 5
6 Question 4 Consider a firm which does not pay dividends. Suppose that its current stock price is $21 per share. In each of the next two years, the stock price will either increase by $4 or decrease by $5. The 2.50% one-year risk-free rate of interest will remain constant. Consider a two-year European call option on the stock with a strike price of $21. (a) Draw the binomial tree for the stock price, together with the final payoffs of the European call option. (5 points) (b) Use the Binomial Option Pricing Model to compute the current value of the European call option. (5 points) (c) Calculate the risk-neutral probabilities and use them to price the European call option. (5 points) (d) Would your answer to points b) and c) change if the option were an American call instead of a European Call? Provide a brief explanation motivating your answer. (5 points). SOLUTIONS Part 1: Multiple-Choice Questions 1 D 2 B PV(Interest tax shields) = τ c D =.30($8.5m) = $2,550m 3 E 4 C 5 E 6 A 7 D 8 D 9 A 10 D 11 A 12 D 4 million shares $25 per share = $100 million gross proceeds Underwriter receives $100 5% = $5 million so, net proceeds = $100 million - $5 million = $95 million. 13 B 14 B 15 A The FCFs from leasing are the annual lease payments (1 - c) since these payments are deductible for tax purposes. The FCFs from buying represent the original cost of the purchase in year 0, and the depreciation tax shield of ($2M / 5 years).35 thereafter. The free cash flows are as follows - - 6
7 The lease equivalent loan (LEL) is equal to the present value of the difference in FCFs from years 1 to 5 discounted at the after tax borrowing rate (.08)(1 -.35) =.052 or 5.2%. LEL= $ 2,130,009. Hence, at the time of the acquisition St. Martin s outflow were $2,500,000 - $2,130,009= $369,991. On the other hand, with the lease contract the initial net outflow would have been $390,000 and the savings therefore amounted to $390,000 $369,991= $20,009. Question 1 Part 2: Open Questions (a) Investors are willing to pay $6 million for an equity stake of 25%, which implies that the value of unlevered equity is $6m 4 = $24 million. You can keep an equity stake of 75% which is worth.75 $24m = $18 million. (b) As capital markets are perfect, MM ensure that the values of the firm is not affected by leverage so that the total value is still $24 million. The value of levered equity is therefore $24m - $4m = $20 million. To raise the additional $2 million needed to finance the project you must therefore sell an equity stake of 10% and are left with an equity stake of 90% which is worth $18 million. Hence, the use of leverage does not affect your wealth in any ways. Question 2 (a) Clark initial market capitalization is $45/share 150 million shares = $6,750 million, of which $900 million in cash. Hence, assets other than cash, including long term assets, are valued by the market at $6,750m $900m = $5,850 million. The true value would instead induce a total market capitalization of $50/share 150 million shares = $7,500 million, so that assets other than cash should be worth $7,500m $900m = $6,600 million. The following table summarizes what happens before and after the repurchase, and after the new information becomes available. Notice that at a price of $45 per share, it is possible to buy back 900/45 = 20 million shares. Before Repurchase After repurchase After New Information Cash Other Assets Total Market value Shares (millions) Share price ($) (b) In this case assets other than cash are correctly valued at $6,600 million before the share repurchase is realized. The following table summarizes what happens before and after the 7
8 share repurchase. Notice that at a price of $50 per share, it is possible to buy back 900/50 = 18 million shares.. Question 3 Before Repurchase After repurchase Cash Other Assets Total Market value Shares (millions) Share price ($) (a) E rwacc = r E + D E + rwacc = D r E + D D (1 - c ), where D = net debt = Debt - Cash or 8.22% Year L D0 = d V 0, hence D0 = (139.58) = Interest tax shield year 1 = 59.82(.055)(.30) = or 0.99 Year D1 = d, hence D1 = (81.06) = Interest tax shield year 2 = (.055)(.30) = or 0.57 Year D2 = d, hence D1 = (27.72) = Interest tax shield year 2 = (.055)(.30) = or 0.20 E runlevered = r E + D E + runlevered = PV of tax shield = (b) D r E + D D, where D = net debt = Debt - Cash = or 8.93%
9 Alternatively, V 0 U = 70/(1.0893) /(1.0893) /(1.0893) 3 = PV of tax shield = V 0 L V 0 U = = Question 4 (a) Stock Call At t = 1, if the stock price is 25 we have (b) = (8 0)/(29 20) = 0.89 B = ( )/1.025 = Hence if the stock price is 25 after one year the European call is worth = At t = 1, if the stock price is 16 the call is worthless and we clearly have = 0 and B = 0. At t = 0 we have = ( )/(25 16) = B = ( )/1.025 = Finally, the value of the European call at t = 0 is = rounded to $2.92 At t = 0 the risk neutral probability that the stock price will increase in one period by $4 is given by (c) 9
10 ! " " "# Similarly, if at t = 1 the stock price jumps to $25, the risk-neutral probability that it will jump to $29 at t = 2 is given by! $ " % Finally, if at t = 1 the stock price drops to $26, the risk-neutral probability that it will jump to $20 at t = 2 is given by "! $ " At expiration, the call produces a positive cash flow of $8 only if the price increases both in year one and two, which happens with a risk-neutral probability of = In all other cases the cash flow of the call is zero at expiration. The value at t = 0 of the call can therefore be computed as & '(!' % (d) A call option on a non-dividend paying stock always has a positive time value, which means that it is never optimal to exercise it before expiration, if this is possible. For this reason an American call option on a non-dividend-paying stock should never be exercised before maturity and is therefore essentially equivalent to a European call option on the same stock with identical maturity and strike price. This means that the answers provided to points b) and c) would remain the same also in the case of an American call. 10
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 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 default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 1 3 4 5 Price
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 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 2010-2011 Chapter 18 Capital Budgeting and Valuation with Leverage
More informationCHAPTER 17. Payout Policy. Chapter Synopsis
CHAPTER 17 Payout Policy Chapter Synopsis 17.1 Distributions to Shareholders A corporation s payout policy determines if and when it will distribute cash to its shareholders by issuing a dividend or undertaking
More informationt = 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 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 informationLeverage 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 informationChapter 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 informationTest3. 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 informationMM1 - 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 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 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 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 all-equity firm D) I and III only
More informationChapter 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 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 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 informationEMBA 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 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 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 informationCapital Structure: Informational and Agency Considerations
Capital Structure: Informational and Agency Considerations The Big Picture: Part I - Financing A. Identifying Funding Needs Feb 6 Feb 11 Case: Wilson Lumber 1 Case: Wilson Lumber 2 B. Optimal Capital Structure:
More informationEMBA 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 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 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 informationSOLUTIONS EXAM 2013-10-25 WRITE AS CLEARLY AND DISTINCTLY AS POSSIBLE!
SOLUTIONS EXAM 2013-10-25 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 must be handed in before you leave
More informationCIS 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 informationMCQ on Financial Management
MCQ on Financial Management 1. "Shareholder wealth" in a firm is represented by: a) the number of people employed in the firm. b) the book value of the firm's assets less the book value of its liabilities
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 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 informationChapter 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 informationExample 1. Consider the following two portfolios: 2. Buy one c(s(t), 20, τ, r) and sell one c(s(t), 10, τ, r).
Chapter 4 Put-Call Parity 1 Bull and Bear Financial analysts use words such as bull and bear to describe the trend in stock markets. Generally speaking, a bull market is characterized by rising prices.
More informationFUNDING INVESTMENTS FINANCE 238/738, Spring 2008, Prof. Musto Class 6 Introduction to Corporate Bonds
FUNDING INVESTMENTS FINANCE 238/738, Spring 2008, Prof. Musto Class 6 Introduction to Corporate Bonds Today: I. Equity is a call on firm value II. Senior Debt III. Junior Debt IV. Convertible Debt V. Variance
More informationCapital Structure. Itay Goldstein. Wharton School, University of Pennsylvania
Capital Structure Itay Goldstein Wharton School, University of Pennsylvania 1 Debt and Equity There are two main types of financing: debt and equity. Consider a two-period world with dates 0 and 1. At
More informationPaper F9. Financial Management. Friday 6 December 2013. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants
Fundamentals Level Skills Module Financial Management Friday 6 December 2013 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Formulae
More informationU + PV(Interest Tax Shield)
CHAPTER 15 Debt and Taxes Chapter Synopsis 15.1 The Interest Tax Deduction A C-Corporation pays taxes on proits ater interest payments are deducted, but it pays dividends rom ater-tax net income. Thus,
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 informationMBA 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 informationBusiness 2019 Finance I Lakehead University. Midterm Exam
Business 2019 Finance I Lakehead University Midterm Exam Philippe Grégoire Fall 2002 Time allowed: 2 hours. Instructions: Calculators are permitted. One 8.5 11 inches crib sheet is allowed. Verify that
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 high-risk projects, which usually have higher IRR due to their high-risk nature, and
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 informationLecture 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 informationA Primer on Valuing Common Stock per IRS 409A and the Impact of FAS 157
A Primer on Valuing Common Stock per IRS 409A and the Impact of FAS 157 By Stanley Jay Feldman, Ph.D. Chairman and Chief Valuation Officer Axiom Valuation Solutions 201 Edgewater Drive, Suite 255 Wakefield,
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 informationCorporate Finance & Options: MGT 891 Homework #6 Answers
Corporate Finance & Options: MGT 891 Homework #6 Answers Question 1 A. The APV rule states that the present value of the firm equals it all equity value plus the present value of the tax shield. In this
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. For partial credit, when discounting, please show the discount rate
More informationINTERVIEWS - 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 informationCHAPTER 16. Financial Distress, Managerial Incentives, and Information. Chapter Synopsis
CHAPTER 16 Financial Distress, Managerial Incentives, and Information Chapter Synopsis In the previous two chapters it was shown that, in an otherwise perfect capital market in which firms pay taxes, the
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 informationFinancial 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 informationOne 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 informationLOCKING IN TREASURY RATES WITH TREASURY LOCKS
LOCKING IN TREASURY RATES WITH TREASURY LOCKS Interest-rate sensitive financial decisions often involve a waiting period before they can be implemen-ted. This delay exposes institutions to the risk that
More informationCHAPTER 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 information2. Exercising the option - buying or selling asset by using option. 3. Strike (or exercise) price - price at which asset may be bought or sold
Chapter 21 : Options-1 CHAPTER 21. OPTIONS Contents I. INTRODUCTION BASIC TERMS II. VALUATION OF OPTIONS A. Minimum Values of Options B. Maximum Values of Options C. Determinants of Call Value D. Black-Scholes
More informationCaput Derivatives: October 30, 2003
Caput Derivatives: October 30, 2003 Exam + Answers Total time: 2 hours and 30 minutes. Note 1: You are allowed to use books, course notes, and a calculator. Question 1. [20 points] Consider an investor
More informationCapital Structure II
Capital Structure II Introduction In the previous lecture we introduced the subject of capital gearing. Gearing occurs when a company is financed partly through fixed return finance (e.g. loans, loan stock
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 informationProfessional Level Skills Module, Paper P4
Answers Professional Level Skills Module, Paper P4 Advanced Financial Management December 2011 Answers 1 Up to 4 professional marks are available for the presentation of the answer, which should be in
More informationUniversity of Waterloo Midterm Examination
Student number: Student name: ANONYMOUS Instructor: Dr. Hongping Tan Duration: 1.5 hours AFM 371/2 Winter 2011 4:30-6:00 Tuesday, March 1 This exam has 12 pages including this page. Important Information:
More informationEquity Analysis and Capital Structure. A New Venture s Perspective
Equity Analysis and Capital Structure A New Venture s Perspective 1 Venture s Capital Structure ASSETS Short- term Assets Cash A/R Inventories Long- term Assets Plant and Equipment Intellectual Property
More informationLECTURE- 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 informationChapter 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 informationCHAPTER 16. Dilutive Securities and Earnings Per Share ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Concepts for Analysis
CHAPTER 16 Dilutive Securities and Earnings Per Share ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Convertible debt and preferred
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 informationA Basic Introduction to the Methodology Used to Determine a Discount Rate
A Basic Introduction to the Methodology Used to Determine a Discount Rate By Dubravka Tosic, Ph.D. The term discount rate is one of the most fundamental, widely used terms in finance and economics. Whether
More informationAmerican Options and Callable Bonds
American Options and Callable Bonds American Options Valuing an American Call on a Coupon Bond Valuing a Callable Bond Concepts and Buzzwords Interest Rate Sensitivity of a Callable Bond exercise policy
More informationHow To Invest In Stocks And Bonds
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 informationPractice Set #7: Binomial option pricing & Delta hedging. What to do with this practice set?
Derivatives (3 credits) Professor Michel Robe Practice Set #7: Binomial option pricing & Delta hedging. What to do with this practice set? To help students with the material, eight practice sets with solutions
More informationTPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 2014 II + III
TPPE17 Corporate Finance 1(5) SOLUTIONS RE-EXAMS 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 informationOption Pricing Applications in Valuation!
Option Pricing Applications in Valuation! Equity Value in Deeply Troubled Firms Value of Undeveloped Reserves for Natural Resource Firm Value of Patent/License 73 Option Pricing Applications in Equity
More informationLecture 12. Options Strategies
Lecture 12. Options Strategies Introduction to Options Strategies Options, Futures, Derivatives 10/15/07 back to start 1 Solutions Problem 6:23: Assume that a bank can borrow or lend money at the same
More informationChapter 21 Valuing Options
Chapter 21 Valuing Options Multiple Choice Questions 1. Relative to the underlying stock, a call option always has: A) A higher beta and a higher standard deviation of return B) A lower beta and a higher
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 informationGlobal Financial Management
1 Global Financial Management Valuation of Cash Flows Investment Decisions and Capital Budgeting Copyright 1999 by Alon Brav, Campbell R. Harvey, Stephen Gray and Ernst Maug. All rights reserved. No part
More informationIESE UNIVERSITY OF NAVARRA OPTIMAL CAPITAL STRUCTURE: PROBLEMS WITH THE HARVARD AND DAMODARAN APPROACHES. Pablo Fernández*
IESE UNIVERSITY OF NAVARRA OPTIMAL CAPITAL STRUCTURE: PROBLEMS WITH THE HARVARD AND DAMODARAN APPROACHES Pablo Fernández* RESEARCH PAPER No 454 January, 2002 * Professor of Financial Management, IESE Research
More informationFinancial Statement and Cash Flow Analysis
Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards
More informationCHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT
CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT PROBLEM SETS 1. In formulating a hedge position, a stock s beta and a bond s duration are used similarly to determine the expected percentage gain or loss
More informationChapter 15: Debt Policy
FIN 302 Class Notes Chapter 15: Debt Policy Two Cases: Case one: NO TAX All Equity Half Debt Number of shares 100,000 50,000 Price per share $10 $10 Equity Value $1,000,000 $500,000 Debt Value $0 $500,000
More informationFinance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6. Part One. Multiple Choice Questions.
Finance 445 Practice Exam Chapters 1, 2, 5, and part of Chapter 6 Part One. Multiple Choice Questions. 1. Similar to the example given in class, assume that a corporation has $500 of cash revenue and $300
More informationChapter 14 Assessing Long-Term Debt, Equity, and Capital Structure
I. Capital Structure (definitions) II. MM without Taxes (1958) III. MM with Taxes (1963) Chapter 14 Assessing Long-Term Debt, Equity, and Capital Structure IV. Financial Distress V. Business Risk VI. Financial
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 risk-adjusted discount rate. Part D Introduction to derivatives. Forwards
More informationThe Tangent or Efficient Portfolio
The Tangent or Efficient Portfolio 1 2 Identifying the Tangent Portfolio Sharpe Ratio: Measures the ratio of reward-to-volatility provided by a portfolio Sharpe Ratio Portfolio Excess Return E[ RP ] r
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial
More informationCHAPTER 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 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 informationINVESTMENT DICTIONARY
INVESTMENT DICTIONARY Annual Report An annual report is a document that offers information about the company s activities and operations and contains financial details, cash flow statement, profit and
More informationModule 4: Complex debt and equity instruments
Page 1 of 31 Module 4: Complex debt and equity instruments Overview This module addresses the classification rules for financial instruments. A financial instrument must be classified as a liability if
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 informationChapter 10 Risk and Capital Budgeting
Chapter 10 Risk and Capital Budgeting MULTIPLE CHOICE 1. Operating leverage describes the relationship between... a. EBIT and sales b. taxes and sales c. debt and equity d. fixed costs and variable costs
More informationFundamentals Level Skills Module, Paper F9. Section A. Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6%
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2015 Answers Section A 1 A 2 D 3 D Mean growth in earnings per share = 100 x [(35 7/30 0) 1/3 1] = 5 97% or 6% 4 A 5 D 6 B 7
More informationProblem 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 information1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600 1,600 1,600 1,600 1,600
Answers Fundamentals Level Skills Module, Paper F9 Financial Management December 2011 Answers 1 (a) Calculation of net present value (NPV) Year 1 2 3 4 5 6 $000 $000 $000 $000 $000 $000 Sales revenue 1,600
More informationReview 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 informationOptions Markets: Introduction
Options Markets: Introduction Chapter 20 Option Contracts call option = contract that gives the holder the right to purchase an asset at a specified price, on or before a certain date put option = contract
More informationUnderstanding Cash Flow Statements
Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The
More informationChapter. How Well Am I Doing? Financial Statement Analysis
Chapter 17 How Well Am I Doing? Financial Statement Analysis 17-2 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Explain the need for and limitations of financial statement
More informationDUKE UNIVERSITY Fuqua School of Business. FINANCE 351 - CORPORATE FINANCE Problem Set #8 Prof. Simon Gervais Fall 2011 Term 2
DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Problem Set #8 Prof. Simon Gervais Fall 2011 Term 2 Questions 1. Hors d Age Cheeseworks has been paying a regular cash dividend
More informationChoice of Discount Rate
Choice of Discount Rate Discussion Plan Basic Theory and Practice A common practical approach: WACC = Weighted Average Cost of Capital Look ahead: CAPM = Capital Asset Pricing Model Massachusetts Institute
More informationStock Valuation: Gordon Growth Model. Week 2
Stock Valuation: Gordon Growth Model Week 2 Approaches to Valuation 1. Discounted Cash Flow Valuation The value of an asset is the sum of the discounted cash flows. 2. Contingent Claim Valuation A contingent
More information