40702FE

40702FE - Name: M.I.T. ID# or S.S.#: 15.407 Final Exam J....

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Name: M.I.T. ID# or S.S.#: 15.407 Final Exam J. Wang Fall 2002 The exam lasts 180 minutes. The exam consists of 10 questions. Please answer all of them. Credit for each question is exactly proportional to the time allotted. 1 /40 2 /20 3 /10 4 /15 5 /25 6 / 7 7 / 8 8 /25 9 /10 10 /20 Total /180 You are allowed two 8 1 2 × 11” sheets of formulas and one calculator. Please answer these questions without consulting anyone. Use the space provided. If more space is needed, use the other side. Be neat and show your work. Answers without work receive no credit. Wrong answers with partially correct work may receive partial credit. Allocate your time optimally.
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1. (40 minutes) True, false or “it depends”. Briefly explain your answer in each case. (a) Maximizing firm’s market value is equivalent to choosing projects with highest expected returns. (b) If bond X has a higher yield to maturity than bond Y, X is usually the better investment. 1
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(c) Growth stocks usually have fast growing dividends. (d) Futures prices for natural gas are always higher for long-term contracts than for short-term contracts. This pattern of prices is caused by the time value of money. 2
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(e) If a three-month call option trades at the money (stock price equals exercise price), then a put with the same exercise price and maturity must be worth less than the call. (f) Diversification reduces risk only when asset returns are uncorrelated. 3
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earn higher returns on average because they are riskier. (h) In valuing risky projects, the correct discount rate is the expected rate of return required by investors on the firm’s common stock. 4
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40702FE - Name: M.I.T. ID# or S.S.#: 15.407 Final Exam J....

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