Final exam and homeworks

Return of Oberman Corp Expected return Oberman Deviation oberProbability 41% 17.40% 23.600% -3.2284800% -18% 17.40% -35.400% -4.8427200% -0.0807 Ducker 0.333333333333333 -15% 9% 36% 10.00% n market 0.333333333333333 -8% 5% 24% 7.00% -15% 8% 30% 8% -12% 7% 21% 5% 1.309629629629630% 1.85185185185186E-05 0.011662963 0.024778 0.010014814814815 9.25925925925927E-05 0.008181481 0.018288888888889 1.35 expected return on asset 8.00% mated to be  -23 % and the return on Rush in the state of boom is estimated to be  3 nd the return on the market portfolio is  0.018 . The standard deviation of the market r Corporation and the overall market portfolio under various economic conditions as r Corporation and the overall market portfolio under various economic conditions as %, the risk-free rate of interest is  9 %, and the beta of asset i is  0.80 , what is the exp bt with a beta of  0.2  and equity of a beta of  1.3 .What is the beta of Oliver Food Corp

as follows. For Woods the state dependent returns are  -0.02  in recession, and e as follows. For Goldday the state dependent returns are  -0.04  in recession, a e as follows. For Goldday the state dependent returns are  -0.02  in recession, a % and variance is  6 %. Benz Corp's stock is $ 42  per share. Its expected return

o be  -18 %. Given this information, what is the covariance between Rush and O % in a boom. Estimates for the market as a whole in the same economic states % in a boom. Estimates for the market as a whole in the same economic states

y of a recession is  0.50  while the probability of an economic boom is  0.50 . ity of a recession is  0.50  while the probability of an economic boom is  0.50 . equally likely. and 50% Honda?

ski and board are two identical firms calculate the levsl of EBIT that woiuld make earining s per share the same for ski and board Answer 1050 this is the brake even point

Free markets Competitive markets Answer Perfect markets How is financial leverage created? Through fixed assets Through derivatives Through equity Answer Through debt Through cash Which of the following accounting relationships defines is an unlevered firm? Assets = Equity - Debt Assets = Debt + Equity Assets = Debt - Equity Equity = Assets - Debt Answer Assets = Equity Stock ABC just announced a reverse stock spit. What would be the effect on ABC Answer Which of the following situations describes purchasing power parity? Answer A decrease in the stock's price per share No change in the stock's price per share An increase in the stock's price per share Purchasing risk free bonds using different currencies Purchasing an equivalent basket of goods with an equivalent amount of currency in two countries

sh flows become greater than the initial investment. Suppose also that the firm and is then followed only by cash outflows? e, zero transactions costs, and full information of all market participants, are kno

C's price per share?

establishes the cutoff of the model payback to be 3 years. (1) What capital bud own as what?

dgeting model are we using, and (2) what decision is recommended from that s

same model?

You buy a put option on a share of stock that has a premium of $0.90 and an exercise price of $8.50. What is the A. ($0.90) Premium $0.90 B. ($0.10) Exercise Price $8.50 C. $1.00 Exp Stock Price $7.50 D. $0.10 Answer Profit/Loss Put $0.10 Answer E. $0.90 You write a call option on a share of stock that has a premium of $0.90 and an exercise price of $8.50. What is the A. ($0.90) Premium $0.90 B. ($0.10) Exercise Price $8.50 C. $1.00 Exp Stock Price $7.50 D. $0.10 -$0.10 E. $0.90 Profit/Loss Call $0.90 Answer Harvest Cereals (HC) imports wheat as a raw ingredient for its product line. The current price of wheat per bushel A. Write put options on wheat B. Write call options on wheat C. Buy call options on wheat Answer C Call option is the best in this ca D. Buy put options on wheat E. Write straddles on wheat The premium of a put option on common stock would decrease if: I. Holding all else equal, the price of the underlying stock goes up. II. Holding all else equal, the volatility of the underlying stock goes down. III. Holding all else equal, the time to expiration gets shorter. A. Only III is true B. I, II, and III are true Answer B Put option could only decrese C. Only I and II are true D. Only I and III are true E. Only II and III are true You buy a straddle (buy a call and buy a put on the same stock at the same strike and same time to expiration) on A. $6 Strike Price $5.00 B. $7 Premiuim Put $1.00 C. $3 Premium Call $2.00 D. $8 Max Loss $3.00 Answer E. Unlimited – there is no limit to your losses on the straddle Harold sells one share of Purell short at a share price of $5 (its current stock price). While it’s impossible to know A. $3 Selling Price $5.00 B. $5 Trade Prices $3.00 C. $8 or $12.00

D. $10 Max Gain $5.00 Answer E. Unlimited Which of the following comes closest to the net present value (NPV) of a project whose initial investment is $25 a A. $0.67 Initial Invesment $ 25.00 B. $1.84 Period 10 C. ($0.67) Cashflow/payme $ 4.00 D. ($2.40) Rate 8% E. ($3.30) NPV $1.84 Answer Which comes closest to the internal rate of return (IRR) of a project that requires an initial investment of $100 an A. 0.50% Initial Investment $100.00 B. 4.14% Cashflow/Payme $150.00 C. 4.81% Period 10 D. 5.45% Need for formula -100 0 0 0 E. 6.05% IRR 4.14% Answer Which of the following values comes closest to the payback of a project that requires an initial investment of $10 A. 2 Years Initial Invesment $10.00 B. 3 Years Clasflow $9.00 C. 4 years Clasflow end of p $10.00 D. 5 Years Period 5 E. Undefined – there is no payback for Payback period 1.22222222222 Answer Therefore closes =2 years In class a scenario was set up whereby Person A offers Person B the chance to select one of two possible trades: ( A. The comparison between the NPV rule and the IRR rule Answer A A so far we h B. The many shortcomings of the payback rule C. The failure to incorporate the arrival of new information D. The possibility of multiple IRRs E. Sensitivity analysis Consider a BORROWING capital budgeting project. Which of the following would describe an acceptable project a A. The present value of the benefits is equal to the present value of the costs B. The present value of the benefits is less than the present value of the costs Answer C. The present value of the benefits is greater than the present value of the costs Consider a standard project whose NPV is exactly $0. Which of the following is true of the same project’s internal A. The IRR = 14% NPV 0 B. The IRR > 0% Rate 14% C. The IRR < 0% Answer 14% In this case the npv is 0 so therefore the I D. The IRR = 0% E. The IRR < 14%

Consider a project whose cash inflow in year 1 is $200 and whose cash outflow in year 1 is $130. If the tax rate is A. $56.11 Cash inflow $ 200.00 Net income B. $55.29 Cash outflow $ 130.00 Income after C. $54.38 Rate 28% Depreciation D. $51.33 Net cashflow $ 65.00 These have to equal Net cashflow E. $52.14 Depreciation $ 52.14 Answer Consider a project expansion that requires new machinery that cost $50 million today. This new machine will last A. $1.945 million Cost $ 50.00 Depreciation B. $15.202 million Period 5 Depreciation C. $14.443 million Inflows $ 70.00 PV D. $13.685 million Outflows $ 50.00 NPV E. $12.927 million Tax Rate 28% Require return 10% Why in the cash flow formula is depreciation first subtracted out and then added back in? A. Because it’s a non-cash expense that serves to reduce taxes ANSWER B. Because it’s a managerial bias C. Because it’s a salvage value D. Because it’s classified as net working capital E. Because it’s a cost that’s already been incurred and will only influence future behavior at the very end of the pr Used this to answer next questions ***** Return to the Sport Hotel example in the class notes, discussed in class, and in Chapter 9 of the textbook. This exa The ORIGINAL information of the Sport Hotel problem was: 1. Projected outflows First year (Purchase Right, Land, and Permits) $ 1,000,000.00 Second Year (Construct building shell $ 2,000,000.00 Third Year: (Finish interior and furnishings) $ 2,000,000.00 TOTAL $ 5,000,000.00 2. Projected inflows If the franchise is granted hotel will be worth: $ 8,000,000.00 When opened If the franchise is denied hotel will be worth: $ 2,000,000.00 When opened The probability of the city being awarded the franchise 50% Question*** Suppose that the following two things from the original problem change: (1) the probability of being awarded the A. NPV = $1.0 Million B. NPV = $0.9 Million Ganted 30% C. NPV = $0.5 Million Denied 70% Franch Granted D. NPV = $0.2 Million E. NPV = $0.0 Million B

Franch Denied **** Return to the original Sport Hotel problem (that is, do not incorporate the two changes from problem 16, and sup A. NPV = $1.0 Million Awarded Deneid B. NPV = $0.9 Million First year $ 2,000,000.00 walk away with the cost of 2m C. NPV = $0.5 Million Total $ 6,000,000.00 -$2,000,000.00 D. NPV = $0.2 Million Hotel woth $ 2,000,000.00 E. NPV = $0.0 Million Chance 50% $ 1,000,000.00 -$1,000,000.00 NPV $0.00 Answer Ends of the questions with **** Suppose that the correlation coefficient between Asset X and Asset Y is 1.00, and that combining some percentag A. Expect maximum diversification benefit such that portfolio risk can be reduced to zero or almost zero B. Expect partial diversification benefit such that some percentage of total risk will likely get reduced C. Expect no diversification benefit such that portfolio risk will be a weighted average of the individual risks 19. Which best describes the term “risk aversion”? A. The rank ordering of gambles by expected value B. The ratio of the covariance to the product of two standard deviations C. The concept that no investment takes place at any price D. The unwillingness to accept risk without the expectation of reward Answer D E. The ability to objectively forecast outcomes that are expected to occur Use the information below to answer the following two questions. State of nature Probability Return M Return A Recesion 50% -0.1 -0.02 If question comes up make sure to change the values of re Expation 50% 0.2 0.1 Which of the following comes closest to the standard deviation of Stock M? A. 0.15 State of natur Probability Return M Mean M Deviation M qaure diviatio B. 0.16 Recesion 50% -0.1 -0.05 -0.15 0.0225 C. 0.17 Expation 50% 0.2 0.1 0.15 0.0225 D. 0.18 Total 0.05 E. 0.20 Answer If we define Stock M as the “market portfolio”, which of the following comes closest to the beta of Stock A? A. 0.000 State of natur Probability Return M Return A Deviation M Mean A B. 0.400 Recesion 50% -0.1 -0.02 -0.15 -0.01 C. 0.375 Expation 50% 0.2 0.1 0.15 0.05 D. 0.353 0.04

E. 0.333 What can we infer about a stock that has a beta of 0.85? A. The stock is considered to be more risky compared to the market B. The standard deviation of the stock is expected to be 85% of that of the market C. The covariance of the stock is 15% lower than the covariance of the market D. If the market falls by 1%, the stock is expected to fall by 0.85% Answer D E. The covariance between the stock and the market is less than zero

option’s profit or loss if at the time of expiration the stock price is $7.50 per share? e option’s profit or loss if at the time of expiration the stock price is $7.50 per share? l will allow HC a reasonable profit margin. And HC understands that the global price of wheat is out of their c ase because call option allows you to set the maximum purchase price, protecting from potential price increa when Stock goes up ot own n Mann Corp with a strike price of $5. The premium on the call option is $1, and the premium on the put opti Purell’s future stock price, Harold notes that Purell has traded between $3 and $10 over the previous 12 mo

and which produces a stream of cash flows of $4 that come at the end of each year for 10 consecutive years nd produces a single cash flow of $150 at the end of year 10? 0 0 0 0 0 0 150 0, produces cash flows of $9 for 4 consecutive years beginning at the end of year 1, and provides a final cash fl (1) Person A trades $0.25 for $0.50, or (2) Person A trades $1.00 for $1.50. The opportunity is for one-time o hace learned that NPV and IRR are our onlt point of comparison at the moment according to the NPV rule? (Only 3 choices) C Beacue of the NPV rule we know that is aceptable when NPV>0 is aceptable therefore the presen l rate of return if the required rate of return is 14%? IRR is equal to the rate

28%, and if the cash flow in Year 1 is $65, what is the depreciation amount in year 1? $ 17.86 $ 5.00 $ 52.14 Change this number from the asnwer the answer has to equal to the net cashflow $ 65.00 t for five years, and will be depreciated straight-line to a value of zero at the end of year five. The new machin 10 $ 17.20 $65.20 $15.20 Answer A Because is a non cash expense that represents the allocation of the cost of an asset over its usefu While it reducess the book value of the assets, it does not involed an actual cash outflow roject am question will use the time line and all the figures in this original problem - for example, the costs of buildi e franchise drops from 50% to 30%, and the value of the hotel, should the franchise not be awarded to the ci Complete hotel gives NPV of +3 m 3 0.9 Abandon Project hotel gives NPV -1 Complete hotel gives NPV of +3 m 3

Abandon Project hotel gives NPV -1 -0.7 NPV 0.2 Answer ppose that the first year outflow is not $1 million but $2 million. Incorporating the real option, and given this million ge of your money in Asset X and some percentage of your money in Asset Y forms a two-stock portfolio. Wha Answer C When assets are perfectly coorelated we can expect no differsication Thre is expectation we will be rewarded for taking the risk eturm M and A times 50% 0.01125 0.01125 0.0225 0.15 Deviation A uct of devia Times 50% -0.06 0.009 0.0045 0.06 0.009 0.0045 0.009

Answer 0.4 If you have a beta of 1 then stock goes up by 0.85 and viseversa

control and changes often. Given this scenario, what option position will provide the best wheat hedge for HC ases tion is $2. What is the most you can possibly lose on the straddle? onths. What is the maximum amount that Harold can make on the short sale?

beginning in one year? The required rate of return is 8%? flow at the end of year 5 of $10? only, and the trade takes place immediately. What concept of capital budgeting was this scenario designed to nt value of the benefits have to be greater thatn the cost

ne is expected to produce project inflows of $70 million per year, beginning one year from today, for five con ul life ing the hotel over three years, the value of the hotel when completed under the two scenarios, and the prob ity, is not $2 million but $1.8 million. Incorporating the real option, and given these two changes, which of th

s change, which of the following is closest to the NPV of the Sport Hotel project at Node B? at would be true with respect to the diversification benefits of this portfolio? This question has only 3 possibl

C?

o illustrate?

nsecutive years. The machine does carry extra costs so that annual project outflows of $50 million will begin bability of the city being awarded the franchise. he following is closest to the NPV of the Sporthotel project at Node B?

le answer choices.

in one year and will continue for five consecutive years. If the firm’s tax rate is 28% and if the required rate o

of return is 10%, which of the following comes closest to the NPV of the project expansion?