University of Hong Kong
Department of Economics and Finance
FINA 2802C – Investment and Portfolio Analysis
First Semester: 20072008
Dr. KamMing Wan
Answers to Problem Set 4
(1)
(a) This is a typical annuity problem, i.e.
25
.
1
$
]
05
.
1
1
1
[
05
.
%
50
*
2
.
0
20
=
−
=
PV
(b) $150 will be the “terminal” value of your investment if you are going to sell
your share in six year.
Therefore, the present value is:
53
.
56
$
05
.
1
150
)
1
(
20
=
=
+
=
T
r
FV
PV
(c) The amount you are willing to pay depends on the total discounted future cash
flow you will receive,
i.e., the sum of (a) and (b) above, which is $57.78.
(d) Since the current dividend is $.2*50%=$.1, the dividend in the next quarter will
be $.1*(1+g), i.e.,
g
g
g
r
DIV
PV
−
+
×
=
−
=
=
05
.
)
1
(
1
.
0
400
$
1
.
g=4.974% per quarter.
Given the current stock price, the market must think that dividends will be growing
at a quoted rate of 19.89%(=4*4.974%) per year.
(e) By examining the above valuation, you will see that, r
↓
⇒
PV
↑
and
g
↑
⇒
PV
↑
(2)
In terms of dollar returns:
Price of Stock Six Months From Now
Stock price:
80
110
All stocks (100 shares)
8,000
11,000
All options (1,000) shares
0
10,000
Bills + 100 options
9,360
10,360
In terms of rate of return, based on a $10,000 investment:
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '09
 GUAN

Click to edit the document details