eng120-spring05-final-Yao-soln

# eng120-spring05-final-Yao-soln - E120 Principles of...

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E120: Principles of Engineering Economics Final Exam Solutions May 14, 2005 Part 1: Concepts. (15 points) 1.1 A commercial airline requires jet fuel to operate its planes. Which of the following actions would allow the company to lock in the acquisition cost of its jet fuel? I. Buy a futures contract on jet fuel. II. Sell a futures contract on jet fuel. III. Buy a futures call option on jet fuel. IV. Sell a futures call option on jet fuel. a. I only b. II only c. IV only d. I and III only e. II and IV only 1.2 Which of the following does Not present an arbitrage opportunity? (Assume no transaction costs and any option can be exercised immediately.) a. An American option sells for more than its intrinsic value prior to expiration. b. A warrant, with exercise price of \$10, sells for \$1; the stock price is \$13. c. A call option, with an exercise price of \$25, sells for \$3; the stock price is \$30. d. A put option, with an exercise price of \$10, sells for \$3; the stock price is \$6. e. A convertible bond sells for less than its conversion value. 1.3 For a call and put option on the same stock, with the same exercise price E, and the same time to maturity T, the call option delta minus the put option delta is equal to . a. minus one b. zero c. plus one d. N(d 1 ) e. N(d 1 ) minus one 1.4 Given the following information: The risk-free rate is 7%, the beta of stock A is 1.2, the beta of stock B is 0.8, the expected return on stock A is 13.5%, and the expected return on stock B is 11.0%. Further, we know that stock A is fairly priced and that the betas of stocks A and B are correct. Which of the following must be true? a. Stock B is also fairly priced. b. The expected return on stock B is too high. c. The expected return on stock A is too high. d. The price of stock B is too high. e. none of the above 1.5 Which of the following statements is False ? a. A project that just breaks even on an accounting basis will just barely pay back (assume the fixed assets are fully depreciated in the project life). b. A project that just breaks even on an accounting basis will have a negative NPV. c. A project cannot earn a positive return unless its payback period is longer than the project life. d.

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## This note was uploaded on 08/30/2008 for the course ENGIN 120 taught by Professor Ilan during the Spring '08 term at Berkeley.

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eng120-spring05-final-Yao-soln - E120 Principles of...

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