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Unformatted text preview: UNIVERSITY OF TORONTO ACT349H1F FALL 2006 TERM TEST 2 ACT349H1F F06 Test 2 v07 Privacy ID A 11. If not already done, please code your Privacy ID as the answer to question 11 on your answer sheet. Your Privacy ID is shown in the page footer at the foot of each page of this test. The Privacy ID is needed so that the correct order of correct answers can be used in grading your answer sheet. UNIVERSITY OF TORONTO ACT349H1F FALL 2006 TERM TEST 2 ACT349H1F F06 Test 2 v07 Privacy ID A 9.( a%0$ 6)P 00C2II9a)You are given the following information on a project: At the end of one year, the value of the project will be either 100,000 or 155,000, and the current value of the project (without the option to abandon) is 125,000. At the end of one year, if the project is worth only 100,000, the capital plant of the project may be sold for 119,000. The prevailing risk free interest rate is 5%. Calculate the value of the abandonment option to the nearest $100. (A) $7,800 (B) $8,200 (C) $8,600 (D) $9,000 (E) The correct answer is not given by (A), (B), (C) or (D) (A) Solution (BMA 8 th . Ed. p. 261) NPV(Without option) = 125,000 = [Prob(up)*155,000 + (1 Prob(up))*100,000]/1.05 Hence Prob(up) = 0.56818 NPV(With option) = [0.56818*155,000 + (10.56818)*119,000]/1.05 =132,814 Hence value of option = 132,814125,000 = 7,814 10.( a%0$ ))P )77 BMA 8 th . Ed. Ch. 11 Quiz Q. 2) Demand for University of Toronto copy cards is expanding rapidly, but the industry is highly competitive. A card plant costs $50,000,000 to set up, and it has an annual capacity of 1,000,000 cards. The production cost is $5 per card, and this cost is not expected to change. The machines have an indefinite physical life and the cost of capital is 4 percent. Calculate the competitive price of a card to the nearest dollar. (A) $5 (B) $7 (C) $10 (D) $15 (E) The correct answer is not given by (A), (B), (C) or (D). (B) Solution(BMA 8 th . Ed. p. 275) 5 + 50,000,000 0.04/1,000,000 =$7 UNIVERSITY OF TORONTO ACT349H1F FALL 2006 TERM TEST 2 ACT349H1F F06 Test 2 v07 Privacy ID A (E) Solution BMA 8th. Ed p. 218 beta = (100/250) * 0 + (50/250)*0.30 + (100/250)*1.4 = 0.62 (weighted average) CAPM says E(R Adam ) = r f + beta * (E(r m ) r f ) = 5% + 0.62*(6%) = 8.72% 8.( a%0$ ))P 6 BMA 8 th . Ed. Ch. 9 Practice Q. 13b) A project has a forecast cash flow two years from now, C 2, of +60. The estimated project beta is 1.5. The market return r...
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 Fall '05
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