8230SampleFinal2

8230SampleFinal2 - MBA 8230 Corporation Finance (Part II)...

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MBA 8230 – Corporation Finance (Part II) Practice Final Exam #2 1. Which of the following input factors, if increased, would result in a decrease in the value of a call option? a. the volatility of the company's stock b. the current price of the stock c. the time to maturity of the option d. the risk-free rate of interest e. the exercise price of the option 2. Which of the following statements is most correct? a. An advantage of traditional DCF cash flow analysis is its ability to automatically reflect option value. b. Options in the capital budgeting sense are the right, but not the obligation, to take some action in the future. c. Capital budgeting options must always have a positive option value. d. Both B and C are correct. e. All of the above are correct. 3. Which of the following statements is most correct? a. A managerial option is an opportunity to respond to changing circumstances, giving managers the opportunity to influence a project's outcome. b. An abandonment option allows a firm to quit a project if operating cash flows turn out to be less than expected. c. A firm would be more likely to accept a project if there is an embedded option in the project. d. Both A and C are correct. e. All of the above are correct. (USE THE INFORMATION BELOW TO ANSWER THE FOLLOWING 2 QUESTIONS) Expected Standard Return Deviation Beta Stock A 20% 14% 1.5 Stock B 25% 18% 2.0 The correlation coefficient between Stock A and Stock B is 0.30. Assume that both Stock A and Stock B are in equilibrium (i.e., for both stocks, the expected rate of return is equal to the required rate of return) and that the expected return on the market is 15 percent. 4. According to the information given above, what is the risk-free rate of interest? a. 5 percent b. 7 percent c. 8 percent d. 10 percent
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e. Not enough information provided to answer this question. 5. What is the beta of a portfolio comprised of 30 percent of Stock A, 50 percent of Stock B, and 20 percent of the risk-free security? a. 1.00 b. 1.25 c. 1.45 d. 1.65 e. Not enough information provided to answer this question. 6. Moltron, Inc. has a beta of 0.80. The risk-free rate is 4 percent and the expected rate of return on the market portfolio is 13.5 percent. Using the CAPM, Moltron s expected return on equity is: a. 4.0 percent b. 9.2 percent c. 10.8 percent d. 11.6 percent e. 14.8 percent 7. Given the following distribution of returns, compute Stock W s standard deviation: State of Economy Probability Stock W Return Recession .35 10% Average growth .50 20% Boom .15 30% a. 0.00% b. 2.37% c. 6.78% d. 7.07% e. 8.41% 8. A portfolio has 60% of its funds invested in Security A and 40% of its funds invested in Security B. Security A has a standard deviation of 18.
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This note was uploaded on 04/28/2011 for the course FIN 1 taught by Professor Prakash during the Spring '11 term at IIT Bombay.

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8230SampleFinal2 - MBA 8230 Corporation Finance (Part II)...

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