CORPORATE FINANCE 1 MOCK MIDTERM
Section A (Answer ALL questions. Report the correct answer in the answers sheet provided)
1. The following are all properties of the NPV rule, except
a) NPVs are additive
b) Intermediate cash flows are invested at the hurd
Corporate Finance 1 Mock Midterm
1. The following are all properties of the NPV rule, except
a) NPVs are additive
b) Intermediate cash flows are invested at the hurdle rate
c) NPV calculations do not allow for interest rate shifts
d) NPV calculations allo
BSc (Econ) Examination by course unit
Wednesday 9th May 2012
ECN371
14:30-16:30
Corporate Finance 1
Duration: 2 hours
YOU ARE NOT PERMITTED TO READ THE CONTENTS OF THIS QUESTION PAPER UNTIL
INSTRUCTED TO DO SO BY AN INVIGILATOR.
Answer ALL questions from
Corporate Finance 1 Problem Set 6- Solutions
Dia cAssume that the Wilshire 5000 currently has a dividend yield of 2% and that on
average, the dividends of Wilshire 5000 firms have increased by about 7% per year.
If the risk-free interest rate is 4%, what
Exercise class week 12
1
Exercise 18.1
What does it mean to assert that the delta of a call
option is 0.7? How can a short position in 1,000 options
be made delta neutral when the delta of each option is
0.7?
2
The Delta of an option measures the sensiti
ECN372 Corporate Finance 2, 2015/2016
Problem Set 1
1. You can invest in a project that requires an initial investment of 8 million,
and that in one year may yield the following cash flows (in millions), according
to the state of the economy:
Recession
8
Chapter 11
Trading Strategies Involving
Options
1
Strategies to be Considered
Bond plus option on a risky asset to create
principal protected note
Stock plus option
Two or more options of the same type (a
spread)
Two or more options of different types (a
ECN372 Corporate Finance 2, 2015/2016
Problem Set 3
1. An unlevered firm will generate a perpetual stream of risky cash flows and has
market value VU = E = 10, 000. The firm is subject to a 40% corporate tax
rate, and interests on debt are tax-deductible.
ECN372 Corporate Finance 2, 2015/2016
Problem Set 2: Solutions
1. a
rE = rF + E (rM rF ) = 0.08 + (1.2) (0.14 0.08) = 15.2%.
From:
rD = rF + D (rM rF )
we obtain:
D =
0.10 0.08
0.02
rD rF
=
=
= 0.33
rM rF
0.14 0.08
0.06
b Using the formula for the WACC:
r
Dr Thomai Filippeli
chapter 10
Lecture 5
Theft versus Earthquake Insurance
Risk of these two hazards is similar (1% chance
that the home will be robbed or damaged)
Risks of the individual policies are similar
But are the risks of the portfolios of policie
ECN372 Corporate Finance 2, 2015/2016
Problem Set 2
1. Assume that all the Modigliani & Miller assumptions hold. Company Z is
financed by a mixture of (risky) debt and equity. You have the following
information about its cost of capital and its capital st
ECN372 Corporate Finance 2, 2015/2016
Problem Set 1: Solutions
1. a The expected project cash flow is
E[X] =
8 + 12 + 16
= 12
3
b The expected rate of return of the project is
E[X]
12
1=
1 = 50%
I
8
IRR =
c The expected rate of return of the stock is
rE
ECN372 Corporate Finance 2, 2015/2016
Problem Set 4: Solutions
1.
a
N P VA = 60 50 = $10
N P VB = (0.5)(100) + (0.5)(10) 50 = $5
b The firm manager will aim at maximizing equity value, not firm value.
Hence she will choose the project with the largest E,
ECN372 Corporate Finance 2, 2015/2016
Problem Set 3: Solutions
1. a Annual and present value of tax shields, and the after-tax value of the firm
for any of the three levels of debt are presented in the following table:
D
(rD D)TC
2, 000
80
5, 000
200
8, 0
ECN372 Corporate Finance 2, 2015/2016
Problem Set 4
1. An all-equity firm has two mutually exclusive investment projects, both requiring a $50 million investment, which it plans to fully fund with debt. Project
A pays off $60 million for certain, and proj
ECN372 Corporate Finance 2, 2015/2016
Problem Set 5
1. The value of firm X at the end of the year depends on the state of the economy,
which can be good or bad. Each state is equally likely. In the good state the
company is worth 150 and in the bad state
ECN372 Corporate Finance 2, 2015/2016
Problem Set 5: Solutions
1. a) The face value of debt is given by:
0.5 F + 0.5 40 = 60 F = 80
The value of the firm is:
V = 0.5 150 + 0.5 40 = 95
The value of equity is:
E = 95 60 = 35
b) The value of debt:
D = 0.5 50
Answers
Money
Facts on Saving and Investing Campaign
www.investoreducation.org
To Test Your
$ marts
1. If you buy a companys stock,
A. you own a part of the company.
When you own stock, you own a part of
the company. There are no guarantees of profits,
or
Chapter 18
The Greek Letters
1
Example
A bank has sold for $300,000 a European call
option on 100,000 shares of a non-dividend
paying stock
S0 = 49, K = 50, r = 5%, s = 20%,
T = 20 weeks, m = 13%
The Black-Scholes-Merton value of the option is
$240,000
Ho
Chapter 9
Mechanics of Options
Markets
1
Review of Option Types
A call is an option to buy
A put is an option to sell
A European option can be exercised only at
the end of its life
An American option can be exercised at any
time
2
Option Positions
Long ca
Text
Dr Thomai Filippeli
Lecture 8
chapter 9
The Dividend Discount Model
Applying the Dividend Discount Model
Total Payout and Free Cash Flow
Valuation Models
Valuation Based on Comparable Firms
Information, Competition, and Stock Prices
A One-Year Invest
chapter 6 page 169
Dr Thomai Filippeli
Lecture 7
1.
Bond Cash Flows, Prices and Yields
2.
Dynamic Behavior of Bond Prices
3.
The Yield Curve and Bond Arbitrage
4.
Corporate Bonds
5.
Sovereign Bonds
Bond Terminology
Bond Certificate
States the terms of th
Quantitative Finance
Lecture: Portfolio Theory
Dr. Le Trung Thanh
Vietnamese German University
January 2016
Introduction to Portfolio Theory
Investment in Two Risky Assets
= simple return on asset A
= simple return on asset B
0 = initial wealth
Assumpti
Quantitative Finance
Lecture: Statistical Analysis of an Ecient Portfolio, Beta
Measure, Single Index Model, CAPM Model
Dr. Le Trung Thanh
Vietnamese German University
January 2016
Portfolio Theory with No Short Sales
2 of 151
Ecient Portfolios without Sh
Quantitative Finance
Lecture: Descriptive Statistics, Constant Expected Return
Model, Hypothesis Testing in the CER Model, The Bootstrap,
The Maximum Likelihood Estimation
Dr. Le Trung Thanh
Vietnamese German University
January 2016
Descriptive Statistics
Quantitative Finance
Lecture: Introduction Lecture and Review of Probability,
Statistics
Dr. Le Trung Thanh
Vietnamese German University
January 2016
The Time Value of Money
Future Value
$ invested for years at simple interest rate per year
Compounding
Quantitative Finance
Lecture: Time Series Concepts
Dr. Le Trung Thanh
Vietnamese German University
January 2016
Time Series Processes
Stochastic (Random) Process
cfw_ 1 2 +1 = cfw_
=
sequence of random variables indexed by time
Observed time series of le
Chapter 3
Hedging Strategies
Using Futures
1
Long & Short Hedges
A short futures hedge is appropriate in case you
know you will have sell an asset in the future and
want to lock in the price.
Eg., a farmer selling corn sometimes in the future.
A long futu
Chapter 12
Option Pricing with
Binomial Trees
1
Option prices and Binomial Trees
Today we will study how to compute the price
of an option
We will make use of binomial trees: a
diagram that represents different possible
paths that might be followed by the
Chapter 2
Mechanics of Futures
Markets
1
Futures Contracts
Exchange traded
Available on a wide range of assets
Specifications need to be defined:
What can be delivered,
Where it can be delivered, &
When it can be delivered
The vast majority of futures doe
Chapter 4
Bonds and Interest Rates
1
Types of Rates
Treasury rates
LIBOR rates
Repo rates
Note: Some rates are directly quoted,
some need to be inferred.
2
Treasury Rates
Rates on instruments issued by a
government in its own currency
3
LIBOR and LIBID
LI
Chapter 7
Swaps
1
Nature of Swaps
A swap is an OTC agreement to exchange
(swap) cash flows at specified future times
according to certain specified rules.
Typically cash flows are calculated based on
future interest rates (e.g. LIBOR, interest rate
swap