Risk
Uncertainty about future outcomes
The greater the dispersion of possible outcomes, the
greater the risk
Most investors tend to be risk averse
All things being equal, investors prefer less ris
Time Value Formulas
Future Value (lump sum):
FVn = PV(1+r)n where PV is the current value
Present Value (lump sum):
PV = FVn/(1+r)n
Present Value for a series of payments (C1, C2, C3, etc):
PV
C1
C2
Valuation Problem Solution
1. a. Beta for the Health Division = 1.15. Cost of Equity = 7% + 1.15 * 5.5% = 13.33%. Cost of Capital
= 13.33% * 0.80 + (7.5% * 0.6) * 0.2 = 11.56%.
b. The table below cont
Solutions to Time Value Problems
There is some notation that I want to point out. Rather than write out the formula for an annuity
1
1
the book, and I, will use some shorthand notation. Atr% =
t is t
Solutions to Stock and Bond Problems
1. Since the coupons are going to be reduced by half they will be $50 for the next three years.
The final payment will be the remaining unpaid coupons of $150, plu
Solutions to Additional Problems Capital Structure
1.
a. Annual tax savings from debt = $ 40 million * .09 * .35 = $ 1.26
b. PV of Savings assuming savings are permanent = $ 40 million .35 = $ 14.00
c
CHAPTER 22: FUTURES MARKETS
CHAPTER 22: FUTURES MARKETS
PROBLEM SETS
1.
There is little hedging or speculative demand for cement futures, since cement prices
are fairly stable and predictable. The tra
CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT
CHAPTER 23: FUTURES, SWAPS, AND RISK MANAGEMENT
PROBLEM SETS
1.
In formulating a hedge position, a stocks beta and a bonds duration are used
similarly t
Finance 30233, Fall 2011
S. Mann
Sample problem - Colgate Straddle deltas solution.
A straddle consists of buying a call and buying a put with the same strike price. Use the
information below to const
Finance 30233, Fall 2011
Name_Solution_
S. Mann
Sample Problem Create Payoff diagrams - solution
Examine the following payoff diagram and call prices:
Option
Call
Cal
Call
Call
Strike
45
50
55
60
Pric
Finance 30233, Fall 2011
S. Mann
Name_Solution_
Sample Problem forward contract valuation
Your firm has existing forward contracts with ESSO Oil to purchase 1 million barrels of oil for
delivery at th
Finance 30233, Fall 2011
S. Mann
Name_Solution_
Sample problem forward pricing
PLQ, Inc. stock is currently priced at $420 per share. It pays a $25 dividend to shareholders of
record in six months. Us
Finance 30233, Fall 2011
S. Mann
Sample problem One Period Binomials - Solution.
1. A stock price is currently $50. It is known that at the end of two months it will be either $53 or
$48. The price pe
Finance 30233, Fall 2011
Name_Solution_
S. Mann
Sample Problem Payoff diagrams - solution
Draw the payoff diagrams for the following positions:
a)
Long 2 calls with strike of 50
Short 1 put with strik
Finance 30233, Fall 2011
Name_Solution_
S. Mann
Sample problem structured currency note.
Structured Note. Assume that the current peso exchange rate is $1 to 10 pesos.
You are considering the purchase
Finance 30233
Fall 2010
S. Mann
Name_Solution_
Sample Problem 1. Solution
Show your work to receive full credit.
Assume the following:
Asset/portfolio
Expected return
Standard deviation
Riskless rate
Finance 30233
Fall 2010
Associate Professor S. Mann
Name_Solution_
Sample Problem 2. Solution
Show your work to receive full credit.
Consider the following, and assume the CAPM holds.
Asset
beta
stand
Finance 30233, Fall 2010
S. Mann
Name_Solution_
Sample problem 3: APT
1. Assume that there is one priced risk factor for assets (This assumption would be true
for the CAPM, as well as a single factor
Finance 30233 , Fall 2010
The Neeley School, TCU
S. Mann
Name_Solution_
Sample Problem Four. Solution
Show your work to receive full credit.
Assume the following:
Riskless borrowing & lending rate is
Finance 30233. Fall 2010
Neeley School of Business
Texas Christian University
S. Mann
Sample problems #5: Yields
Name_Solution_
1. Yield Curves.
You observe the following zero-coupon bond yields (all
Finance 30233. Fall 2010
Neeley School of Business
Texas Christian University
S. Mann
Name_Solution_
Sample problems #6: forward rates , bond pricing: solution
For all parts, use the following informa
Finance 30233, Fall 2010
S. Mann
Name_solution_
Sample problem for final_01 solution.
The Bogus bank has the following market value asset/liability structure:
Assets
$10,000,000
Asset duration (modifi
Finance 30233, Fall 2010
S. Mann
Name_Solution_
Sample problem for final #2
PLQ, Inc. stock is currently priced at $420 per share. It pays a $25 dividend to shareholders of
record in six months. Use t
Finance 30233, Fall 2010
S. Mann
Sample problem for final #3.
Name_Solution_
Structured Note. Assume that the current peso exchange rate is $1 to 10 pesos.
You are considering the purchase of a one-ye
Finance 30233, Fall 2010
S. Mann
Name_Solution_
Sample Problem for Final #4: Solution
Your firm has existing forward contracts with ESSO Oil to purchase 1 million barrels of oil for
delivery at the en
Finance 30233, Fall 2010
Advanced Investments
S. Mann
Name_Solution_
Sample problem for final: # 5.
Billy Hill manages a $100 million equity portfolio for Silverman Bags, Inc.
His equity portfolio has
Finance 30233, Fall 2010
Advanced Investments, S. Mann
Sample problem for final: # 6.
Name_Solution_
Billy Hill manages a $100 million equity portfolio for Silverman Bags, Inc.
His equity portfolio ha
Finance 30233, Fall 2010
Advanced Investments
S. Mann
Name_Solution_
Sample problem for final: # 7: solution.
Christine Callaghan manages a $100 million bond portfolio for a pension fund. At the
begin
Finance 30233, Fall 2010
M.J. Neeley School of Business, TCU
S. Mann
Self-quiz Monday, November 08, 2010
Name_
Examine the following information regarding options written on MMM stock. At the
time of