Sample Exam 3 Answers - Sample Exam 3 Business Finance...

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Sample Exam 3 Business Finance (2007) This sample exam contains 8 questions (question 1 having 13 questions). But, in the actual exam, there will be only 5 questions (question 1 having only 10 subquestions). After graduating from the McCombs School of Business, you are hired by Tri-Star Electronics Inc. as its CFO. You are given with the following tasks: 1. ( True or False ) Your colleague, the Chief Marketing Officer (CMO), is confused with many of the financial concepts, and sometimes makes false statements. For each of the following statements, evaluate whether it is true or false . If false, explain why. a) (1 point) If a call option holder opts to exercise her call option, the call option seller must sell the underlying asset to the call option holder. True. Call option sellers do not have an option. He is obligated to sell shares when the call option holder exercises her option. b) (1 point) Put option value is higher with a higher exercise price. True. Higher exercise price increases the chance of share price being below the exercise price, and thus let the put option holder benefit. c) (1 point) Call option value is higher for stocks with lower volatility. False. Call option value is higher for stocks with higher volatility. Greater volatility increases the chance of share price being above the exercise price, and thus let the call option holder benefit. Greater volatility also increases the chance of share price being below the exercise price, but the call option holder does not make a loss in this case because he can opt not to exercise the option. d) (1 point) The pay off to a corporate stock holder in a levered firm A is same as the pay off to an investor that owns a put option, the underlying asset of which is the shares of firm A and the exercise price of which is the face value of firm A ’s debt. False. It is same as the pay off to an investor that owns a call option, the underlying asset of which is the shares of firm A and the exercise price of which is the face value of firm A’s debt. e) (1 point) The pay off to an investor that holds a corporate debt (with a face value
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of F ) issued by firm A with limited liability is same as the pay off to an investor that owns a debt (with a face value of F ) without default risk and have sold a put option, the exercise price of which is same as the face value of her bond. True. If one buys a riskless bond with a face value of F and also writes a put with an exercise price of F , she will have the payoff when an investor holds a risky corporate debt with a face value of F . f) (1 point) Hold out problem can be resolved if law allows the bidder to have squeeze-out rights. True. If one knows that he will be squeezed out (e.g. paid the bidding price even if he retains), there is no reason to hold out. Thus, the hold out problem is resolved. g)
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This note was uploaded on 02/23/2009 for the course FIN 374C taught by Professor Goldreyer during the Fall '08 term at University of Texas at Austin.

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Sample Exam 3 Answers - Sample Exam 3 Business Finance...

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