SOLUTIONS EXAM WRITE AS CLEARLY AND DISTINCTLY AS POSSIBLE!


 Wilfrid Hopkins
 5 years ago
 Views:
Transcription
1 SOLUTIONS EXAM 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 (even if it contains no solution sheets). 3. State on the folder the number of solution sheets that it contains. About the test 1. Aids allowed:  Calculator (all admitted, but empty memory).  Dictionary to English language if necessary, free of notes and calculations. No other aids are allowed. 2. At each problem is stated the number of points that a correct solution is given. To pass the test the total points should be 18 or higher. 3. It is important that the solution method and arguments leading to a conclusion are clearly stated. Answers without motivation are not accepted WRITE AS CLEARLY AND DISTINCTLY AS POSSIBLE! GOOD LUCK! Problem 1 (10 points)
2 a) Explain the following concepts: i. The inherent conflict (dysfunctionality) of Corporate Governance in typical large public firm (1pts.) ii. The effect of market interest rates on Bond Prices and Yield (1pts.) b) Explain why maximizing the NPV is the correct decision rule in comparison to the IRR. (2pts.) c) Do you think a stable historical growth rate in dividends leads to a constant price of the firm s stock? Explain. (2 pts.) d) Suppose that a young couple just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 7.5%. The parents deposit $2500 the first year and plan to increase the size of their deposits by 4.5% each year. What is the amount available for their daughter's college expenses on her 19th birthday, give that the parents made the final deposit on her 19 th birthday? (2pts.) e) You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2500 and you have made every payment on time. The original term of the mortgage was 30 years, and the mortgage is exactly four years and eight months old. You have just made your monthly payment. The mortgage interest rate is 6.38% (APR). How much do you owe on the mortgage today? (2pts.) Problem 2 (10 points) a) Explain the following concepts: i. Systematic and unsystematic risk (1pts.) b) Write down the assumptions of the CAPM. Derive the CAPM mathematically. Explain the efficient portfolio and the capital market line. (Draw necessary diagrams and equations to justify of your answer) ( =5pts.) c) A hedge fund has created a portfolio using just two stocks. It has shorted $45,000,000 worth of Volvo stock and has purchased $75,000,000 of Toyota stock. The correlation between Volvo s and Toyota s returns is The expected returns and standard deviations of the two stocks are given in the table below: Expected Return Standard Deviation Volvo 10% 40% Toyota 15% 45% i. What is the expected return of the hedge fund s portfolio? ii. What is the standard deviation of the hedge fund s portfolio? (1+1.5=2.5 pts.) d) The ABC Mutual Fund has an expected return of 25% and a volatility of 20%. ABC claims that no other portfolio offers a higher Sharpe ratio. Suppose this claim is true, and the riskfree interest rate is 4.5%. I. What is ABC s Sharpe Ratio? II. Problem 3 (10 points) If ebay s stock has a volatility of 45% and an expected return of 15%, what must be its correlation with the ABC fund? (.5+1=1.5pts.)
3 a) Explain the following concepts: i. Direct and Indirect Bankruptcy costs (2 pts.) b) What are the assumptions underlying the ModiglianiMiller theorem? Mathematically derive the MM1 Proposition in the presence of corporate taxes and show that value of the levered firm is equal to the value of the unlevered firm plus present value of the tax shield. (1+2=3pts.) c) The valuation model of a growing firm seems to validate the theory of dividend policy irrelevance. Explain this model and show how it ignores dividend policy. Prove that dividend policy is irrelevant at a discount rate of 12 percent, if a firm with two million shares decides to tradeoff dividend between two periods by paying 20 percent less in the current period as against the policy of constant $50m in all periods. (3 pts.) d) ABC maintains a debtequity ratio of 0.85, and has an equity cost of capital of 12.5%, and a debt cost of capital of 7.5%. ABC s corporate tax rate is 40%, and its market capitalization is $220 million. If ABC s free cash flow is expected to be $10 million in one year, what constant expected future growth rate is consistent with the firm s current market value? Estimate the value of ABC s interest tax shield. (1+1= 2pts.) Problem 4 (10 points) a) Explain the following concepts: I. Clientele effect and the Signaling hypothesis? (1pts.) II. Risk neutral Probabilities (1pts.) III. Public and Private debt (1 pts.) IV. Convertible Bond and Warrant (1pts.)(=4 pts.) b) Write down the assumption of the BlackScholes option pricing model. What is the unknown factor in valuation of options? Why would an investor be interested in creating a long strangle position? (1+2=3 pts.) c) Consider an option on TBX share with an exercise price (X) of $50.00 and maturing in 60 days. A call option is selling at a premium of $5.00 while a put option is selling at a premium of $3.00. The current market interest rate is 12% per annum while a TBX share is selling at $50.50 I. Estimate, with supporting explanations, the intrinsic and time values of the call and put options. II. III. Using the putcall parity relationship, explain if the options are appropriately priced. If the options are not appropriately priced explain how you are going to take advantage of the mispricing. Show and explain any profit position arising from your strategy in a diagram. (1+1+1 =3 pts.)
4 ANSWER: Problem 1 (10 points) (A) Explain the following concepts: a. The inherent conflict (dysfunctionality) of Corporate Governance in typical large public firm (1pts.) The dysfunctionality of corporate governance such as a lack of transparency and of managerial accountability: investors are imperfectly informed of managers actions  a level of compensation that is not always related to performance accounting manipulations  managerial accountability, corporate governance failures (B) Explain why maximizing the NPV is the correct decision rule in comparison to the IRR. (3pts.) Sometimes firms must decide among mutually exclusive projects. The manager must rank the projects and choose the best one. In this case, NPV again yields the correct decision. Suppose a project with a positive NPV is being compared with another project that is identical in all respects, except that the size is double. Then the larger project will have an NPV that is double that of the first, meaning it is clearly the better project. However, the IRRs for the two projects will be the same. Hence IRR cannot be used to evaluate mutually exclusive projects of different scales. By the same token, IRR cannot be used consistently to evaluate two projects with different timing or different risk. One improvement of IRR is included here. The incremental IRR investment rule applies the IRR rule to the difference between the cash flows of the two mutually exclusive alternatives. This approach will give the same answer as NPV. However, incremental IRR still has some problems. First, the incremental IRR could not exist, or there could be several. The fact that the incremental IRR exceeds the cost of capital does not imply that the NPV of either project is positive. In addition, it is sometimes difficult to keep track of which project is the incremental project. (C) Do you think a stable historical growth rate in dividends leads to a constant price of the firm s stock? Explain. (2 pts.) The assumption that the growth rate in dividends has to be constant over time is a difficult assumption to meet, especially given the volatility of earnings. If a firm has an average growth rate that is close to a stable growth rate, the model can be used with little real effect on value. Thus, a cyclical firm that can be expected to have yeartoyear swings in growth rates, but has an average growth rate that is 5%, can be valued using the Gordon growth model, without a significant loss of generality. There are two reasons for this result. First, since dividends are smoothed even when earnings are volatile, they are less likely to be affected by yeartoyear changes in earnings growth. Second, the mathematical effects of using an average growth rate rather than a constant growth rate are small. (D) Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 7%. The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year. Assuming that, the parents have already made the deposit for their daughter's 18th birthday. Then, what is the amount available for their daughter's college expenses on her 18th birthday.? (2pts.) Explanation: growing annuity $2, (1.07)18 = $97, (E) You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2356 and you have made every payment on time. The original term of the mortgage was 30 years, and the mortgage is exactly four years and eight months old. You have just made your monthly payment. The mortgage interest rate is 63 8% (APR). How much do you owe on the mortgage today? (2pts.)
5 To find out what is owed, compute the PV of the remaining payments using the loan interest rate to compute the discount rate: Discount Rate = = % 12 2, PV = 1 ( ) 304 = $354, Problem 2 (10 points) (A) Explain the following concepts: (a)systematic and unsystematic risk (1pts.) Usually stock prices fluctuate due to two types of news. Firm specific: news about the company itself. The risk associated is then called firmspecific, unsystematic or diversifiable. Marketwide: news about the whole economy, affecting the whole market. The risk associated is then called systematic, undiversifiable. If firms are only affected by firmspecific risk, then it is possible to reduce the risk significantly through diversification, adding more and more stocks in the portfolio, so that returns offset each other. Therefore no compensation is needed for that. In reality firms are linked to both types of risk. The point is, only systematic risk must be compensated, since it is the only risk that cannot be canceled away through diversification. (B) Write down the assumptions of the CAPM. Derive the CAPM mathematically. Explain the efficient portfolio and the capital market line. (Draw necessary diagrams and equations to justify of your answer) ( =5pts.) Note: Gazi Lecture+Seminar02+Note for CAPM (C) A hedge fund has created a portfolio using just two stocks. It has shorted $35,000,000 worth of Oracle stock and has purchased $85,000,000 of Intel stock. The correlation between Oracle s and Intel s returns is The expected returns and standard deviations of the two stocks are given in the table below: b. a. What is the expected return of the hedge fund s portfolio? b. What is the standard deviation of the hedge fund s portfolio?(1+1.5=2.5 pts.) Answer: a. The total value of the portfolio is $50m = ( $35 + $85). This means that the weight on Oracle is 70% and the weight on Intel is 170%. The expected return is Expected return = % % = 16.25%. ( ) ( ) ( ) ( ) ( ) ( ) Variance = = Std dev = ( ) 0.5 = 53.2%
6 (D) The ABC Mutual Fund has an expected return of 20% and a volatility of 20%. ABC claims that no other portfolio offers a higher Sharpe ratio. Suppose this claim is true, and the riskfree interest rate is 5%. III. IV. What is ABC s Sharpe Ratio? If ebay s stock has a volatility of 40% and an expected return of 11%, what must be its correlation with the ABC fund? (.5+1=1.5pts.) a. Optima s Sharpe Ratio = (20% 5%)/20% = 0.75 b. ebay s Sharpe Ratio = (11% 5%)/40% = 0.15, It s correlation must be 0.15/0.75 = 0.2 (Note: Text Book: Using equation 11.18) Problem 3 (10 points) (A) Explain the following concepts: a. Direct and Indirect Bankruptcy costs (2 pts.) The costs of bankruptcy: _ Direct costs. Administrative and legal costs. _ Indirect costs. They are much larger than direct costs: 1. The perception on the part of customers that the firm is in trouble. Customers may stop purchasing the product or service. 2. Suppliers start demanding stricter terms as protection against default, leading to an increase in working capital. 3. Firms may.nd it di cult to raise fresh capital (equity and debt) leading to the rejection of good investment projects. _ Indirect costs are higher for: 1. Firms selling durable products with long lives that require replacement parts and services. (ex a computer manufacturer) 2. Firms selling goods and services where quality is an important atttribute (ex if a car maker is in trouble its customers may be uncertain of the quality of its cars) 3. Firms producing products whose value to customer depends on services and complementary products supplied by independent.rms (If Apple computer gets into trouble, companies producing software for its computers may stop producing.) 4. Firms that sell products that require continuous service (A manufacturer of copying machines is more accepted than a furniture manufacturer.) (B)What are the assumptions underlying the ModiglianiMiller theorem? Mathematically derive the MM1 Proposition in the presence of corporate taxes and show that value of the levered firm is equal to the value of the unlevered firm plus present value of the tax shield. (1+2=3pts.) Note: Seminar2 note (Both assumption and Derivation). (C)The valuation model of a growing firm seems to validate the theory of dividend policy irrelevance. Explain this model and show how it ignores dividend policy. Prove that dividend policy is irrelevant at a discount rate of 12 percent, if a firm with two million shares decides to tradeoff dividend between two periods by paying 20 percent less in the current period as against the policy of constant $50m in all periods. (3 pts.) Presentation and analysis of a valuation model for a growing firm, such as; V 0 = EBIT(1t c)/(1+k u) + I t(r t  k u)/k u(1+k u) t=2 In this model, growth is driven by constant differential between return on investment
7 and cost of capital ((r t  k u)). The components of this model need to be carefully explained. It does not contain any factor that depicts the influence of dividend policy on value of the firm. The relevant factors contributing to value of the firm are; return on investment cost of capital The information provided can be used to prove that dividend policy is irrelevant. With constant amount of dividend payout the value of firm and equity are; Value of firm: V F = DIV 0 + DIV 1/(1+r) = /1.12 = $94.643m Value of equity: V E =94.643/2 = $47.32 With the tradeoff in dividend payout the value of the firm and equity are; Value of firm: V F = DIV 0 + DIV 1/(1+r) = /1.12 = $94.643m Value of equity: V E =94.643/2 = $47.32 The values remain the same, indicating that dividend policy is irrelevant. (B) Restex maintains a debtequity ratio of 0.85, and has an equity cost of capital of 12%, and a debt cost of capital of 7%. Restex s corporate tax rate is 40%, and its market capitalization is $220 million. If Restex s free cash flow is expected to be $10 million in one year, what constant expected future growth rate is consistent with the firm s current market value? Estimate the value of Restex s interest tax shield. (1+1= 2pts.) = 12% + 7% = 8.42% L FCF 10 V = E + D = = 407 = = WACC g g a. WACC ( ) 10 g = = 5.96% pretax WACC = 12% + 7% = 9.70% U FCF 10 V = = = $267 million pretax WACC g PV Interest Tax Shield = = $140 million b. ( ) Problem 4 (10 points) (A) Explain the following concepts: a) Clientele effect and the Signaling hypothesis? (1pts.) Clientele Effect: Different groups of investors, or clienteles, prefer different dividend policies. Firm s past dividend policy determines its current clientele of investors. Clientele effects impede changing dividend policy. Taxes & brokerage costs hurt investors who have to switch companies due to a change in payout policy. Signaling Hypothesis: Investors view dividend changes as signals of management s view of the future. Managers hate to cut dividends, so won t raise dividends unless they think raise is sustainable. Therefore, a stock price increase at time of a dividend increase could reflect higher expectations for future EPS, not a desire for dividends. b) Risk neutral Probabilities (1pts.) If all market participants are risk neutral, then all financial assets (including options) have the same cost of capital, the riskfree rate of interest. The Binomial and BlackScholes models give the same option price no matter what the actual risk preferences and expected stock returns are. In the real world, investors are risk averse and require a positive risk premium to compensate for risk, while in a hypothetical riskneutral world, investors do not require compensation for risk.
8 c) Public and Private debt (1 pts.) Public Debt Domestic bonds are issued by a local entity, traded in a local market, but purchased by foreigners. Domestic bonds are issued by a local entity, traded in a local market, but purchased by foreigners. Foreign bonds are issued by foreign entity, traded on local markets, intended for local investors. Eurobonds are international bonds denominated in a foreign currency. Consequently there is no connection between the physical location of the trading market and the location of the issuing entity. Global bonds combine the features of the others and are offered on different markets simoultaneously. Private Debt Bank loans are an example of private debt, not publicly traded. A syndicated loan is financed by a group of banks instead of only one. Term loan indicates a loan that lasts for a prespecified period. A revolving line of credit is a credit commitment for a specific time period up to some limit, which a company can use if needed. A private placement is a bond issue that does not trade on public market but is sold to a small group of investors. It is less costly to issue. Sovereign debt is debt issued by national governments. US government issues Treasury bills (up to 26 weeks) and bonds of various maturities (2, 3, 5, 10 years). Moreover long bonds with maturities 20 years and 30 years. d) Convertible Bond and Warrant (1pts.)(=4 pts.) A convertible bond is a bond which can be converted before maturity into a predetermined number of shares of the issuing company. Basically it is like a normal bond with an embedded warrant which represents a call option on the stock. e) Write down the assumption of the BlackScholes option pricing model. What is the unknown factor in valuation of options? Why would an investor be interested in creating a long strangle position? (1+2=3 pts.) BlackScholes Option Pricing Model: A technique for pricing Europeanstyle options when the stock can be traded continuously. It can be derived from the Binomial Option Pricing Model by allowing the length of each period to shrink to zero and letting the number of periods grow infinitely large. Assumption: The short selling of securities with full use of proceeds is permitted There are no transaction costs or taxes. All securities are perfectly divisible There are no dividends during the life of the derivative There are no riskless arbitrage opportunities. Securitiy trading is continuous The riskfree rate of interest, r, is constant and the same for all maturities. Why would an investor be interested in creating a long strangle position? (2 marks) An investor would be interested to create a long strangle position if he believes that the price of the underlying security is likely to fluctuate significantly such that the future price will be at a significant deviation from some predetermined level. On the other hand the investor is uncertain of the direction. In the above illustration the investor believes that the stock s price will fluctuate by C+P+0.5(E 2 E 1) around the value 0.5(E 2 + E 1). Come the expiration day, the investor believe that one of the options will be in the money (hence have an intrinsic value) by at least the magnitude of the fluctuation. A strangle allows for wider fluctuation than a straddle (which allows a fluctuation of only C+P around the exercise price E). A short position (a strangle or a straddle) assumes the opposite: that the price is not going to move outside a certain band. An investor taking the position profits by pocketing the proceeds from the call and put options sold while believing that the intrinsic value of any of the option at expiration (i.e. the one that will be in the money hence exercised) will at most equal the proceed from the options sold..
9 (f) Consider an option on TBX share with an exercise price (X) of $50.00 and maturing in 60 days. A call option is selling at a premium of $5.00 while a put option is selling at a premium of $3.00. The current market interest rate is 12% per annum while a TBX share is selling at $50.50 (i)estimate, with supporting explanations, the intrinsic and time values of the call and put options. (ii) Using the putcall parity relationship, explain if the options are appropriately priced. (iii) If the options are not appropriately priced explain how you are going to take advantage of the mispricing. Show and explain any profit position arising from your strategy in a diagram. (1+1+1 =3 pts.) Answer: (i)estimate, with supporting explanations, the intrinsic and time values of the call and put options. Since a TBX share is selling at $50.50 which is above the strike price for the two options then the call option is in the money and the put is out of money. Exercising the call option the holder will be buying TBX stock at $50.00 which can be sold at $ The intrinsic value of the call option is $0.50 and the time value is $4.50. The put option is out of the money and the entire premium is time value. (ii)using the putcall parity relationship, explain if the options are appropriately priced T From part (b) the PutCall Parity has the form: C0 P0 = S0 E(1 + r) The LHS is $0.20 (i.e. $0.50$0.30) The RHS is $0.148 (i.e. $50.50$50.00x ) The LSH is higher meaning that the call option is overpriced relative to the put option. (iii)if the options are not appropriately priced explain how you are going to take advantage of the mispricing. Show any profit position arising from your strategy. To exploit the mispricing one has to engage in riskless arbitrage as follows: Borrow $49.02 at 12% interest per annum for two months Sell a call option for $0.50 and buy a put option for $0.30. Use the total funds raised from the three transactions (i.e. $51.02) to buy the stock at $ This leaves a balance of $0.52. At the end of the 60 days the proceeds from the stock will always be $50.00 which will be used to repay the borrowed funds. (Notice that if the price is below $50.00 the put that you re holding will be in the money and the call that you sold out of money). You exercise the put by disposing the stock at $ If the price is above $50.00, the put that you re holding will be out of money and the call that you sold in the money). The call will be exercised and you ll be forced to give up the stock for only $50.00)
10 TPPE17 Corporate Finance 10(5) THE CUMULATIVE NORMAL DISTRIBUTION Table gives N(x). To obtain N(x) use N(x) = 1N(x). Use interpolation, e.g. N(0.6278) = N(0.62)+0.78*(N(0.63)N(0.62))= x ,0 0,5000 0,5040 0,5080 0,5120 0,5160 0,5199 0,5239 0,5279 0,5319 0,5359 0,1 0,5398 0,5438 0,5478 0,5517 0,5557 0,5596 0,5636 0,5675 0,5714 0,5753 0,2 0,5793 0,5832 0,5871 0,5910 0,5948 0,5987 0,6026 0,6064 0,6103 0,6141 0,3 0,6179 0,6217 0,6255 0,6293 0,6331 0,6368 0,6406 0,6443 0,6480 0,6517 0,4 0,6554 0,6591 0,6628 0,6664 0,6700 0,6736 0,6772 0,6808 0,6844 0,6879 0,5 0,6915 0,6950 0,6985 0,7019 0,7054 0,7088 0,7123 0,7157 0,7190 0,7224 0,6 0,7257 0,7291 0,7324 0,7357 0,7389 0,7422 0,7454 0,7486 0,7517 0,7549 0,7 0,7580 0,7611 0,7642 0,7673 0,7704 0,7734 0,7764 0,7794 0,7823 0,7852 0,8 0,7881 0,7910 0,7939 0,7967 0,7995 0,8023 0,8051 0,8078 0,8106 0,8133 0,9 0,8159 0,8186 0,8212 0,8238 0,8264 0,8289 0,8315 0,8340 0,8365 0,8389 1,0 0,8413 0,8438 0,8461 0,8485 0,8508 0,8531 0,8554 0,8577 0,8599 0,8621 1,1 0,8643 0,8665 0,8686 0,8708 0,8729 0,8749 0,8770 0,8790 0,8810 0,8830 1,2 0,8849 0,8869 0,8888 0,8907 0,8925 0,8944 0,8962 0,8980 0,8997 0,9015 1,3 0,9032 0,9049 0,9066 0,9082 0,9099 0,9115 0,9131 0,9147 0,9162 0,9177 1,4 0,9192 0,9207 0,9222 0,9236 0,9251 0,9265 0,9279 0,9292 0,9306 0,9319 1,5 0,9332 0,9345 0,9357 0,9370 0,9382 0,9394 0,9406 0,9418 0,9429 0,9441 1,6 0,9452 0,9463 0,9474 0,9484 0,9495 0,9505 0,9515 0,9525 0,9535 0,9545 1,7 0,9554 0,9564 0,9573 0,9582 0,9591 0,9599 0,9608 0,9616 0,9625 0,9633 1,8 0,9641 0,9649 0,9656 0,9664 0,9671 0,9678 0,9686 0,9693 0,9699 0,9706 1,9 0,9713 0,9719 0,9726 0,9732 0,9738 0,9744 0,9750 0,9756 0,9761 0,9767 2,0 0,9772 0,9778 0,9783 0,9788 0,9793 0,9798 0,9803 0,9808 0,9812 0,9817 2,1 0,9821 0,9826 0,9830 0,9834 0,9838 0,9842 0,9846 0,9850 0,9854 0,9857 2,2 0,9861 0,9864 0,9868 0,9871 0,9875 0,9878 0,9881 0,9884 0,9887 0,9890 2,3 0,9893 0,9896 0,9898 0,9901 0,9904 0,9906 0,9909 0,9911 0,9913 0,9916 2,4 0,9918 0,9920 0,9922 0,9925 0,9927 0,9929 0,9931 0,9932 0,9934 0,9936 2,5 0,9938 0,9940 0,9941 0,9943 0,9945 0,9946 0,9948 0,9949 0,9951 0,9952 2,6 0,9953 0,9955 0,9956 0,9957 0,9959 0,9960 0,9961 0,9962 0,9963 0,9964 2,7 0,9965 0,9966 0,9967 0,9968 0,9969 0,9970 0,9971 0,9972 0,9973 0,9974 2,8 0,9974 0,9975 0,9976 0,9977 0,9977 0,9978 0,9979 0,9979 0,9980 0,9981 2,9 0,9981 0,9982 0,9982 0,9983 0,9984 0,9984 0,9985 0,9985 0,9986 0,9986 3,0 0,9987 0,9987 0,9987 0,9988 0,9988 0,9989 0,9989 0,9989 0,9990 0,9990 3,1 0,9990 0,9991 0,9991 0,9991 0,9992 0,9992 0,9992 0,9992 0,9993 0,9993 3,2 0,9993 0,9993 0,9994 0,9994 0,9994 0,9994 0,9994 0,9995 0,9995 0,9995 3,3 0,9995 0,9995 0,9995 0,9996 0,9996 0,9996 0,9996 0,9996 0,9996 0,9997 3,4 0,9997 0,9997 0,9997 0,9997 0,9997 0,9997 0,9997 0,9997 0,9997 0,9998 3,5 0,9998 0,9998 0,9998 0,9998 0,9998 0,9998 0,9998 0,9998 0,9998 0,9998 3,6 0,9998 0,9998 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 3,7 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 3,8 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 0,9999 3,9 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 4,0 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000 1,0000
TPPE17 Corporate Finance 1(5) SOLUTIONS REEXAMS 2014 II + III
TPPE17 Corporate Finance 1(5) SOLUTIONS REEXAMS 2014 II III Instructions 1. Only one problem should be treated on each sheet of paper and only one side of the sheet should be used. 2. The solutions folder
More 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 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 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 : Options1 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. BlackScholes
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 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 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 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 PutCall 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 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 informationOption Values. Option Valuation. Call Option Value before Expiration. Determinants of Call Option Values
Option Values Option Valuation Intrinsic value profit that could be made if the option was immediately exercised Call: stock price exercise price : S T X i i k i X S Put: exercise price stock price : X
More informationChapter 11 Options. Main Issues. Introduction to Options. Use of Options. Properties of Option Prices. Valuation Models of Options.
Chapter 11 Options Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Part C Determination of riskadjusted discount rate. Part D Introduction to derivatives. Forwards
More information1. What are the three types of business organizations? Define them
Written Exam Ticket 1 1. What is Finance? What do financial managers try to maximize, and what is their second objective? 2. How do you compare cash flows at different points in time? 3. Write the formulas
More informationFinal Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator
University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights
More informationOptions Pricing. This is sometimes referred to as the intrinsic value of the option.
Options Pricing We will use the example of a call option in discussing the pricing issue. Later, we will turn our attention to the PutCall Parity Relationship. I. Preliminary Material Recall the payoff
More informationChapter 14 Capital Structure in a Perfect Market
Chapter 14 Capital Structure in a Perfect Market 141. Consider a project with free cash flows in one year of $130,000 or $180,000, with each outcome being equally likely. The initial investment required
More informationOption Valuation. Chapter 21
Option Valuation Chapter 21 Intrinsic and Time Value intrinsic value of inthemoney options = the payoff that could be obtained from the immediate exercise of the option for a call option: stock price
More informationCHAPTER 20. Financial Options. Chapter Synopsis
CHAPTER 20 Financial Options Chapter Synopsis 20.1 Option Basics A financial option gives its owner the right, but not the obligation, to buy or sell a financial asset at a fixed price on or until a specified
More informationModels of Risk and Return
Models of Risk and Return Aswath Damodaran Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for
More informationChapter 5 Financial Forwards and Futures
Chapter 5 Financial Forwards and Futures Question 5.1. Four different ways to sell a share of stock that has a price S(0) at time 0. Question 5.2. Description Get Paid at Lose Ownership of Receive Payment
More informationOptions/1. Prof. Ian Giddy
Options/1 New York University Stern School of Business Options Prof. Ian Giddy New York University Options Puts and Calls PutCall Parity Combinations and Trading Strategies Valuation Hedging Options2
More informationLOCKING IN TREASURY RATES WITH TREASURY LOCKS
LOCKING IN TREASURY RATES WITH TREASURY LOCKS Interestrate sensitive financial decisions often involve a waiting period before they can be implemented. This delay exposes institutions to the risk that
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 informationReview for Exam 2. Instructions: Please read carefully
Review for Exam Instructions: Please read carefully The exam will have 1 multiple choice questions and 5 work problems. Questions in the multiple choice section will be either concept or calculation questions.
More informationOptions (1) Class 19 Financial Management, 15.414
Options (1) Class 19 Financial Management, 15.414 Today Options Risk management: Why, how, and what? Option payoffs Reading Brealey and Myers, Chapter 2, 21 Sally Jameson 2 Types of questions Your company,
More informationLecture 3: Put Options and DistributionFree Results
OPTIONS and FUTURES Lecture 3: Put Options and DistributionFree Results Philip H. Dybvig Washington University in Saint Louis put options binomial valuation what are distributionfree results? option
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 informationPaper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants
Fundamentals Pilot Paper Skills module Financial Management Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper
More 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 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 informationChapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.)
Chapter 17 Corporate Capital Structure Foundations (Sections 17.1 and 17.2. Skim section 17.3.) The primary focus of the next two chapters will be to examine the debt/equity choice by firms. In particular,
More informationCHAPTER 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 informationFutures Price d,f $ 0.65 = (1.05) (1.04)
24 e. Currency Futures In a currency futures contract, you enter into a contract to buy a foreign currency at a price fixed today. To see how spot and futures currency prices are related, note that holding
More informationValueBased Management
ValueBased Management Lecture 5: Calculating the Cost of Capital Prof. Dr. Gunther Friedl Lehrstuhl für Controlling Technische Universität München Email: gunther.friedl@tum.de Overview 1. Value Maximization
More informationThe Tangent or Efficient Portfolio
The Tangent or Efficient Portfolio 1 2 Identifying the Tangent Portfolio Sharpe Ratio: Measures the ratio of rewardtovolatility provided by a portfolio Sharpe Ratio Portfolio Excess Return E[ RP ] r
More 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 informationThe CAPM (Capital Asset Pricing Model) NPV Dependent on Discount Rate Schedule
The CAPM (Capital Asset Pricing Model) Massachusetts Institute of Technology CAPM Slide 1 of NPV Dependent on Discount Rate Schedule Discussed NPV and time value of money Choice of discount rate influences
More informationCost of Capital, Valuation and Strategic Financial Decision Making
Cost of Capital, Valuation and Strategic Financial Decision Making By Dr. Valerio Poti,  Examiner in Professional 2 Stage Strategic Corporate Finance The financial crisis that hit financial markets in
More informationLecture 5: Put  Call Parity
Lecture 5: Put  Call Parity Reading: J.C.Hull, Chapter 9 Reminder: basic assumptions 1. There are no arbitrage opportunities, i.e. no party can get a riskless profit. 2. Borrowing and lending are possible
More information11 Option. Payoffs and Option Strategies. Answers to Questions and Problems
11 Option Payoffs and Option Strategies Answers to Questions and Problems 1. Consider a call option with an exercise price of $80 and a cost of $5. Graph the profits and losses at expiration for various
More informationCHAPTER 21: OPTION VALUATION
CHAPTER 21: OPTION VALUATION PROBLEM SETS 1. The value of a put option also increases with the volatility of the stock. We see this from the putcall parity theorem as follows: P = C S + PV(X) + PV(Dividends)
More informationCall and Put. Options. American and European Options. Option Terminology. Payoffs of European Options. Different Types of Options
Call and Put Options A call option gives its holder the right to purchase an asset for a specified price, called the strike price, on or before some specified expiration date. A put option gives its holder
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 informationFIN 3710. Final (Practice) Exam 05/23/06
FIN 3710 Investment Analysis Spring 2006 Zicklin School of Business Baruch College Professor Rui Yao FIN 3710 Final (Practice) Exam 05/23/06 NAME: (Please print your name here) PLEDGE: (Sign your name
More 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 informationInstitutional Finance 08: Dynamic Arbitrage to Replicate Nonlinear Payoffs. Binomial Option Pricing: Basics (Chapter 10 of McDonald)
Copyright 2003 Pearson Education, Inc. Slide 081 Institutional Finance 08: Dynamic Arbitrage to Replicate Nonlinear Payoffs Binomial Option Pricing: Basics (Chapter 10 of McDonald) Originally prepared
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 informationThe Lee Kong Chian School of Business Academic Year 2015 /16 Term 1
The Lee Kong Chian School of Business Academic Year 2015 /16 Term 1 FNCE101 FINANCE Instructor : Dr Chiraphol New Chiyachantana Tittle : Assistant Professor of Finance (Education) Tel : 6828 0776 Email
More informationOne Period Binomial Model
FIN40008 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 informationCHAPTER 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 informationOption Values. Determinants of Call Option Values. CHAPTER 16 Option Valuation. Figure 16.1 Call Option Value Before Expiration
CHAPTER 16 Option Valuation 16.1 OPTION VALUATION: INTRODUCTION Option Values Intrinsic value  profit that could be made if the option was immediately exercised Call: stock price  exercise price Put:
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 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 twoperiod world with dates 0 and 1. At
More informationSAMPLE MIDTERM QUESTIONS
SAMPLE MIDTERM QUESTIONS William L. Silber HOW TO PREPARE FOR THE MID TERM: 1. Study in a group 2. Review the concept questions in the Before and After book 3. When you review the questions listed below,
More informationFidelity Emerging Markets Fund 14 Fidelity Europe Fund 12 Fidelity Far East Fund 3,10 Fidelity Global Fund 1,14 Fidelity Global Disciplined
Simplified Prospectus dated October 29, 2015 Fidelity Funds Series A, Series B, Series F and Series O units (unless otherwise indicated) Equity Funds Canadian Equity Funds Fidelity Canadian Disciplined
More informationPaper F9. Financial Management. Friday 6 June 2014. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants.
Fundamentals Level Skills Module Financial Management Friday 6 June 2014 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Formulae
More informationEcon 422 Summer 2006 Final Exam Solutions
Econ 422 Summer 2006 Final Exam Solutions This is a closed book exam. However, you are allowed one page of notes (doublesided). Answer all questions. For the numerical problems, if you make a computational
More informationFinance 436 Futures and Options Review Notes for Final Exam. Chapter 9
Finance 436 Futures and Options Review Notes for Final Exam Chapter 9 1. Options: call options vs. put options, American options vs. European options 2. Characteristics: option premium, option type, underlying
More informationGESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE
GESTÃO FINANCEIRA II PROBLEM SET 5 SOLUTIONS (FROM BERK AND DEMARZO S CORPORATE FINANCE ) LICENCIATURA UNDERGRADUATE COURSE 1 ST SEMESTER 20102011 Chapter 18 Capital Budgeting and Valuation with Leverage
More informationwww.optionseducation.org OIC Options on ETFs
www.optionseducation.org Options on ETFs 1 The Options Industry Council For the sake of simplicity, the examples that follow do not take into consideration commissions and other transaction fees, tax considerations,
More informationOn BlackScholes Equation, Black Scholes Formula and Binary Option Price
On BlackScholes Equation, Black Scholes Formula and Binary Option Price Abstract: Chi Gao 12/15/2013 I. BlackScholes Equation is derived using two methods: (1) riskneutral measure; (2)  hedge. II.
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 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 informationThe Lee Kong Chian School of Business Academic Year 2012/13 Term 1
The Lee Kong Chian School of Business Academic Year 2012/13 Term 1 FNCE101 FINANCE Instructor Name : Daniel A Stone Title : Adjunct Tel : Email Office : TBD : dstone@smu.edu.sg COURSE DESCRIPTION This
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 informationCHAPTER 20 Understanding Options
CHAPTER 20 Understanding Options Answers to Practice Questions 1. a. The put places a floor on value of investment, i.e., less risky than buying stock. The risk reduction comes at the cost of the option
More informationGeneral Forex Glossary
General Forex Glossary A ADR American Depository Receipt Arbitrage The simultaneous buying and selling of a security at two different prices in two different markets, with the aim of creating profits without
More informationEC372 Bond and Derivatives Markets Topic #5: Options Markets I: fundamentals
EC372 Bond and Derivatives Markets Topic #5: Options Markets I: fundamentals R. E. Bailey Department of Economics University of Essex Outline Contents 1 Call options and put options 1 2 Payoffs on options
More informationCash flow before tax 1,587 1,915 1,442 2,027 Tax at 28% (444) (536) (404) (568)
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2014 Answers 1 (a) Calculation of NPV Year 1 2 3 4 5 $000 $000 $000 $000 $000 Sales income 5,670 6,808 5,788 6,928 Variable
More informationPricing Forwards and Futures
Pricing Forwards and Futures Peter Ritchken Peter Ritchken Forwards and Futures Prices 1 You will learn Objectives how to price a forward contract how to price a futures contract the relationship between
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 informationFinance 2 for IBA (30J201) F. Feriozzi Resit exam June 18 th, 2012. Part One: MultipleChoice Questions (45 points)
Finance 2 for IBA (30J201) F. Feriozzi Resit exam June 18 th, 2012 Part One: MultipleChoice Questions (45 points) Question 1 Assume that capital markets are perfect. Which of the following statements
More informationPaper F9. Financial Management. Friday 7 June 2013. Fundamentals Level Skills Module. The Association of Chartered Certified Accountants.
Fundamentals Level Skills Module Financial Management Friday 7 June 2013 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Formulae
More informationUse the table for the questions 18 and 19 below.
Use the table for the questions 18 and 19 below. The following table summarizes prices of various defaultfree zerocoupon bonds (expressed as a percentage of face value): Maturity (years) 1 3 4 5 Price
More informationValue of Equity and Per Share Value when there are options and warrants outstanding. Aswath Damodaran
Value of Equity and Per Share Value when there are options and warrants outstanding Aswath Damodaran 1 Equity Value and Per Share Value: A Test Assume that you have done an equity valuation of Microsoft.
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 informationCHAPTER 20: OPTIONS MARKETS: INTRODUCTION
CHAPTER 20: OPTIONS MARKETS: INTRODUCTION PROBLEM SETS 1. Options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk
More informationTest3. Pessimistic Most Likely Optimistic Total Revenues 30 50 65 Total Costs 2520 15
Test3 1. The market value of Charcoal Corporation's common stock is $20 million, and the market value of its riskfree debt is $5 million. The beta of the company's common stock is 1.25, and the market
More informationChapter 17 Does Debt Policy Matter?
Chapter 17 Does Debt Policy Matter? Multiple Choice Questions 1. When a firm has no debt, then such a firm is known as: (I) an unlevered firm (II) a levered firm (III) an allequity firm D) I and III only
More informationOptions. + Concepts and Buzzwords. Readings. PutCall Parity Volatility Effects
+ Options + Concepts and Buzzwords PutCall Parity Volatility Effects Call, put, European, American, underlying asset, strike price, expiration date Readings Tuckman, Chapter 19 Veronesi, Chapter 6 Options
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 informationSession IX: Lecturer: Dr. Jose Olmo. Module: Economics of Financial Markets. MSc. Financial Economics
Session IX: Stock Options: Properties, Mechanics and Valuation Lecturer: Dr. Jose Olmo Module: Economics of Financial Markets MSc. Financial Economics Department of Economics, City University, London Stock
More informationContribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257)
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2012 Answers 1 (a) Calculation of net present value (NPV) As nominal aftertax cash flows are to be discounted, the nominal
More informationModule 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS
1.0 FINANCING PRINCIPLES Module 1: Corporate Finance and the Role of Venture Capital Financing Financing Principles 1.01 Introduction to Financing Principles 1.02 Capitalization of a Business 1.03 Capital
More informationRisk and Return Models: Equity and Debt. Aswath Damodaran 1
Risk and Return Models: Equity and Debt Aswath Damodaran 1 First Principles Invest in projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for
More informationChapter 7. . 1. component of the convertible can be estimated as 1100796.15 = 303.85.
Chapter 7 71 Income bonds do share some characteristics with preferred stock. The primary difference is that interest paid on income bonds is tax deductible while preferred dividends are not. Income bondholders
More informationBlack Scholes Merton Approach To Modelling Financial Derivatives Prices Tomas Sinkariovas 0802869. Words: 3441
Black Scholes Merton Approach To Modelling Financial Derivatives Prices Tomas Sinkariovas 0802869 Words: 3441 1 1. Introduction In this paper I present Black, Scholes (1973) and Merton (1973) (BSM) general
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 informationAssessing Credit Risk for a Ghanaian Bank Using the Black Scholes Model
Assessing Credit Risk for a Ghanaian Bank Using the Black Scholes Model VK Dedu 1, FT Oduro 2 1,2 Department of Mathematics, Kwame Nkrumah University of Science and Technology, Kumasi, Ghana. Abstract
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 informationThe cost of capital. A reading prepared by Pamela Peterson Drake. 1. Introduction
The cost of capital A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction... 1 2. Determining the proportions of each source of capital that will be raised... 3 3. Estimating the marginal
More informationCOST OF CAPITAL Compute the cost of debt. Compute the cost of preferred stock.
OBJECTIVE 1 Compute the cost of debt. The method of computing the yield to maturity for bonds will be used how to compute the cost of debt. Because interest payments are tax deductible, only aftertax
More informationEstimating Beta. Aswath Damodaran
Estimating Beta The standard procedure for estimating betas is to regress stock returns (R j ) against market returns (R m )  R j = a + b R m where a is the intercept and b is the slope of the regression.
More informationFinancial Options: Pricing and Hedging
Financial Options: Pricing and Hedging Diagrams Debt Equity Value of Firm s Assets T Value of Firm s Assets T Valuation of distressed debt and equitylinked securities requires an understanding of financial
More informationUntangling F9 terminology
Untangling F9 terminology Welcome! This is not a textbook and we are certainly not trying to replace yours! However, we do know that some students find some of the terminology used in F9 difficult to understand.
More informationAPPENDIX 3 TIME VALUE OF MONEY. Time Lines and Notation. The Intuitive Basis for Present Value
1 2 TIME VALUE OF MONEY APPENDIX 3 The simplest tools in finance are often the most powerful. Present value is a concept that is intuitively appealing, simple to compute, and has a wide range of applications.
More informationCHAPTER 11: ARBITRAGE PRICING THEORY
CHAPTER 11: ARBITRAGE PRICING THEORY 1. The revised estimate of the expected rate of return on the stock would be the old estimate plus the sum of the products of the unexpected change in each factor times
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 informationChapter 5 Risk and Return ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS
Chapter 5 Risk and Return ANSWERS TO SELECTED ENDOFCHAPTER QUESTIONS 51 a. Standalone risk is only a part of total risk and pertains to the risk an investor takes by holding only one asset. Risk is
More informationOPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17)
OPTIONS MARKETS AND VALUATIONS (CHAPTERS 16 & 17) WHAT ARE OPTIONS? Derivative securities whose values are derived from the values of the underlying securities. Stock options quotations from WSJ. A call
More informationINTERVIEWS  FINANCIAL MODELING
420 W. 118th Street, Room 420 New York, NY 10027 P: 2128544613 F: 2128546190 www.sipa.columbia.edu/ocs INTERVIEWS  FINANCIAL MODELING Basic valuation concepts are among the most popular technical
More information