MIT Sloan School of Management
J. Wang E52-456 15.407 Fall 2003
Problem Set 9: Capital budgeting
Due: December 9, 2003 1. (BM) United Pigpen is considering a proposal to manufacture high-protein hog-feed. The project would make use of an existing warehous

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 2 3 4 5 6 7 8 9 10 /40 /20 /

Chapter 11 Capital Asset Pricing Model (CAPM)
Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Part C Determination of discount rates.
Historic asset returns. Time value of money. Risk. Portfolio theory.
Capital

Chapter 10 Portfolio Theory
Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates. Part C Determination of discount rates.
Historic asset returns. Time value of money. Risk.
Portfolio theory.
Capital Asset Pricing Mo

Chapter 9 Risk
Road Map Part A Introduction to Finance. Part B Valuation of assets, given discount rates. Part C Determination of discount rates.
Historic asset returns. Time value of money.
Risk.
Portfolio theory. Capital Asset Pricing Model (CAPM). A

Chapter 8 Time Value of Money
Road Map Part A Introduction to Finance. Part B Valuation of assets, given discount rates. Part C Determination of discount rates.
Historical asset returns.
Time value of money.
Risk. Portfolio theory. Capital Asset Pricin

Part C
Time and Risk
Introduction to Part C Time Value and Price of Risk
I. Premise in Previous Discussions
So far in the course, we have said that: 1. Prices of cash flows with different timing and risk are determined in financial markets. 2. Prices of a

Chapter 7 Historical Asset Returns
Road Map Part A Introduction to Finance. Part B Valuation of assets, given discount rates. Part C Determination of discount rates.
Historical asset returns.
Time value of money. Risk. Portfolio theory. Capital Asset Pri

Chapter 5 Forwards and Futures
Road Map Part A Introduction to finance. Part B Valuation of assets, given discount rates.
Fixed income securities. Common stocks.
Forwards and futures.
Options.
Part C Determination of discount rates. Part D Introduction

Chapter 4 Common Stocks
Road Map Part A Introduction to finance. Part B Valuation of assets given discount rates.
Fixed-Income securities.
Stocks.
Forward and futures. Options.
Part C Determination of discount rates. Part D Introduction to corporate fi

Part B
Valuation
Introduction to Part B Valuation
I. Overview of Financial Markets:
1. Money Markets - short-term, liquid, low-risk debt securities (a) Treasury bills (b) Bank instruments: CD, CP, BA . . . (c) Fed funds and repos (d) LIBOR market . . . 2.

Chapter 3 Fixed Income Securities
Road Map Part A Introduction to finance. Part B Valuation of assets given discount rates.
Fixed-Income securities.
Stocks. Forward and futures. Options
Part C Determination of discount rates. Part D Introduction to corpo

Chapter 2 Present Value
Road Map Part A Introduction to finance.
Financial markets and financial decisions.
Present value.
Part B Valuation of assets, given discount rates. Part C Determination of discount rates. Part D Introduction to corporate finance

Chapter 1 Introduction to Finance
Road Map Part A Introduction to finance.
Financial decisions and principles of finance.
Present value.
Part B Valuation of assets, given discount rates. Part C Determination of discount rates. Part D Introduction to corp

15.407 J. Wang
Finance Theory December 2, 2003 Bemus Investment Management (BIM)
Bemus Investment Management has landed yet another client, Lorenzo Partners, one of the largest architectural and engineering design firms in upstate New York. You have been

Jiang Wang E52-456 wangj@mit.edu
MIT Sloan School of Management 15.407 Course Syllabus Finance Theory
(Current Draft: October 14, 2003)
Finance Theory 15.407 Fall 2003
Course Description
The path-breaking advances in finance theory and pratice over the pa

MIT Sloan School of Management
J. Wang E52-456 15.407 Fall 2002
Solution to Midterm Exam
October 29, 2002
1. (a) False. The shareholders do not need to agree with the value of the firm's assets for the market value of the firm to be maximized. The shareho

Name:
M.I.T. ID# or S.S.#: 15.407 Midterm Exam Jiang Wang Fall 2002
The exam lasts 90 minutes. The exam consists of five questions. Please answer all of them. Credit for a question is exactly in proportion to the time allotted. Question Points/Minutes 1

MIT Sloan School of Management
J. Wang E52-456 15.407 Fall 2003
Midterm 2002
Answers to 1(d) and 1(f) 1(d): Uncertain: In terms of riskless bonds, higher yield to maturity means higher average returns. However for risky bonds that does not need to be true

MIT Sloan School of Management
J. Wang E52-456 15.407 Fall 2002
Solution to Final Exam
Fall 2002
1. (a) False. Maximizing firm's market value is equivalent to investing in projects with positive and greatest NPV. NPV of projects with high expected returns

15.407 Recitation
December 4, 2003
MIT Sloan School of Management
CAPM, APT and Capital Budgeting: Things to cover today:
1. Theory of CAPM
2. Theory of APT
3. Notes regarding Captial Budgeting
CAPM: CAPM states that: E(Ri) - Rf = i(E(Rm) - Rf ) where i =

15.407 Recitation
November 19, 2003
MIT Sloan School of Management
Portfolio Choice: Things to cover today:
1. Risk and return of a portfolio
2. Effects of diversification
3. How to choose an optimal portfolio
4. Problems of Portfolio Choice
Algebra revie

15.407 Recitation
November 5, 2003
MIT Sloan School of Management
Interest rates and risks: Things to cover today:
1. Theory of interest rates
2. Risk and its measurements
Characteristics of interest rates:
(Nominal) positive Upward sloping in general Lo

15.407 Recitation
October 23, 2003
MIT Sloan School of Management
Things to cover today:
Options:
1. Price bounds for options
2. American option and early exercise
3. Factors affecting price of option
4. Ways to price options
5. Risk Neutral Pricing
Price

15.407 Recitation
October 16, 2003
MIT Sloan School of Management
Things to cover today:
Basics of Options:
1. Introducing Options
2. AOB
Definitions: Options: The owner of an option has the right to buy (or sell) a specified asset on (or before) a given

15.407 Recitation
October 9, 2003
MIT Sloan School of Management
Things to cover today:
Forwards and Futures:
1. Questions about Equity pricing?
2. Forwards and Futures - Market Convention
3. Pricing
4. Hedging
Definitions: Forwards: A commitment to purch

MIT Sloan School of Management
J. Wang E52-456 15.407 Fall 2003
Recitation Notes 10/2/2002
1. Company XYZ's year-end dividend will be $1. It will grow at 10% for 10 years and then slows down to 5% per year forever. The cost of capital for XYZ is 15%. What

15.407 Recitation
October 2, 2003
MIT Sloan School of Management
Things to cover today:
Pricing Risky Cashflows:
1. DDM
2. Financial Ratios
3. Examples
4. Past Problem Sets (PS1 Q4, PS2 Q6)
DDM: The idea of DDM is: Pt = Et[ t+1 t+1 ] 1+rt+1 Where rt+1 is

MIT Sloan School of Management
J. Wang E52-456 15.407 Fall 2003
Examples Sept 25, 03
1. (20 points) The Wall Street Journal gives the following bond prices: (Each bond has a principle of $1,000.)
Bond 1 2 3
Maturity (years) 1 2 3
Coupon rate (%) 0.00 2.00