Example 1:
Gold sells for $1,000 an ounce in NY and $1,100 in London.
Is there an arbitrage opportunity?
Yes: Buy gold in NY, Sell gold in London
Today
Buy gold in NY
-$1,000
Sell gold in London
+$1,100
Net
+$100
Example 2:
Now, instead of buying and sell
Application Problems (second half)
Topics:
1.
2.
3.
4.
I.
Stock valuation: Dividend discount model
Stock valuation: Discounted free cash flow model
Multiples valuation
Cost of capital
Dividend discount model
1.
Suppose you bought 1 share of Xcetera Corp.
FIN 5203 Mid-term Solutions
1. You just won the lottery and youre trying to decide how much of your winnings to save for retirement.
a. Suppose you can earn a 5% investment rate on your savings. You want to set aside enough
savings today so that you have
Financial Management: Homework-concept-lecture note Mapping
Homework 1: Valuation Principle and Law of One Price
Questio
n
1
2
3
4
5
6
7
Concepts covered
Valuation principle
Valuation principle
Law of one price, value additivity, no-arbitrage
Law of one p
Present (and future) value formulas
Concept
Future Value of a single cash flow
Present Value of a single cash flow
Present Value of a stream (sequence) of cash
flows
Applications (examples)
Saving for some future expense like college or
retirement (how mu
7. Your firm is planning to invest in an automated packaging plant. Harburtin Industries is an all-equity
firm that specializes in this business. Suppose Harburtin's equity beta is 0.85, the risk-free rate is 5%, and
the market risk premium is 4%.
a. If y
Financial Management: Sample Exam
Use the information for the question below.
Assume that Rose Corporation's (RC) earnings are not expected to grow in the future and that all
earnings are paid out as dividends. RC is currently an all equity firm. It expec
Financial Management: Sample Exam
1) Assume that Rose Corporation's (RC) earnings are not expected to grow in the future and that
all earnings are paid out as dividends. RC is currently an all equity firm. It expects to generate
earnings of $6 million ove
Personal Finance Applications
1. I want to have $2 mm saved by the time I retire in 30 years.
i.
How much do I have to invest today (one time) if my investment rate is 5%?
PV = 2 mm/(1.05)^30 = 462,755
ii.
If I set aside some money at the end of each year
Application Problems (second half)
Topics:
1. Stock valuation: Dividend discount model
2. Stock valuation: Discounted free cash flow model
3. Multiples valuation
4. Cost of capital
I.
Dividend discount model
1. Suppose you bought 1 share of Xcetera Corp.