428 Valuation
Spring 2008
Prelim 2 Solution
Multiple Choice 5 points each (total 40 points)
1. You analyze an industry selling consumer staples the unit prices of which rises at the
rate of inflation.
For next year you project a 5% increase in the unit sales of the industry
and expect inflation to be 2%.
Hence, you expect the industry’s sales next year to be:
a) 5% higher than the industry’s sales this year
b) 7% higher than the industry’s sales this year
c) 9% higher than the industry’s sales this year
d) 10% higher than the industry sales this year
e) 12% higher than the industry sales this year
Ans: b)
2. Based on your analysis of the economy and the industry you project industrywide
sales to increase by 25%.
XYZ expects its sales to increase by 75%.
The implied growth
of the market share of XYZ is:
3.
A stock is worth $40 today. In the next six months it may increase to $46 or
decrease to $35. The riskfree rate of interest is 4% per year. Use the binomial model
to determine the price of a put option with a strike price of $39 and an expiration date
in six months.
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4.
You purchase a European call option with one year to expiration for $2.50.
The exercise price is $25 per share and the current stock price is $22. You also
purchase a put option on the same stock with the same exercise price and the
same expiration date for $5. If the stock price rises to $26 at the end of the year
the call option payoff is __________ and the put option payoff is __________.
5.
Option prices __________ as time to expiration __________ and as the risk of
the underlying asset __________.
a. decrease; increases; increases
b. increase; increases; increases
c. increase; decreases; increases
d. increase; decreases; decreases
e. decrease; increases; decreases
ANS: C
6.
The hedge ratio is based on:
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 Spring '08
 NG,D.
 Strike price, new product line

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