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lecture14post - Recap Final exam 2010 Course wrap-up...

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Recap Final exam 2010 Course wrap-up Lecture 14 - Final review BUSI 588, Fall 2011 Diego Garc´ ıa Kenan-Flagler Business School UNC at Chapel Hill October 12th, 2011 c ± Diego Garc´ ıa, BUSI 588, Kenan-Flagler, Fall 2011 Lecture 14 - Final review 1 / 24
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Recap Final exam 2010 Course wrap-up Outline 1 Recap Equity and debt as options 2 Final exam 2010 Tips Problems 3 Course wrap-up Derivative tools Final thoughts Handouts today: Class slides. Homework 5 solutions. c ± Diego Garc´ ıa, BUSI 588, Kenan-Flagler, Fall 2011 Lecture 14 - Final review 2 / 24
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Recap Final exam 2010 Course wrap-up Problem 1 Get financing solving D = 30 = 100 - C ( S = 100 , K = F , 0 . 1 , 10 , 0 . 2) for F = 78 . 82 (as in Botvinnik). Will equityholders have an incentive to risk-shift? Yes, their call is worth more with more risk/less NPV ($71.08m vs $70m). Will equityholders have an incentive to include covenants? Yes, ex-ante they are better-off (even if ex-post they would like to cheat). c ± Diego Garc´ ıa, BUSI 588, Kenan-Flagler, Fall 2011 Lecture 14 - Final review 3 / 24
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Recap Final exam 2010 Course wrap-up Problem 2 Value of risky debt D = 250 1 . 08 - P ( S = 200 , K = 250 , r f = 0 . 08 , t = 1 , σ = 0 . 25); or $190.74, with a credit spread of 23%! Will equityholders ditch the $12m? Only if the equity stake goes up by $12m. Equity before $9.26. After the project $17.18. They will not do it. Why? “Debt overhang:” debtholders rip the benefits of the investment. c ± Diego Garc´ ıa, BUSI 588, Kenan-Flagler, Fall 2011 Lecture 14 - Final review 4 / 24
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Recap Final exam 2010 Course wrap-up Main takeaway from Clinton Payoffs from this project, if we wait one year, are identical to the payoffs of 50000 put options on silver with a strike price of $31. By LOOP (law-of-one-price) the value of the project will be equal to the value of 50000 put options on silver with a strike price of $31. Since we did not have market values for these options, we use Black-Scholes to estimate them (first estimating volatility). c ± Diego Garc´ ıa, BUSI 588, Kenan-Flagler, Fall 2011 Lecture 14 - Final review 5 / 24
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Recap Final exam 2010 Course wrap-up 2011 final exam A total of five problems. Not hard, but long. Please, do not spend more minutes than points on a give problem. Be here by 8.45am to settle in. Think about where you would go buy a derivatives exam (in case you want to take one in November). Think priceless , think fun. c ± Diego Garc´ ıa, BUSI 588, Kenan-Flagler, Fall 2011 Lecture 14 - Final review 6 / 24
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Recap Final exam 2010 Course wrap-up Q1 – Oratio Dominica 1 Black-Scholes calculator: value for the put of $2.81. 2
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lecture14post - Recap Final exam 2010 Course wrap-up...

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