FIN403/IE412
2015-2016
Solutions for Exercises
1) A butterfly spread is created by buying the $55 put, buying the $65 put and selling two of the $60
puts. This costs 3 8 2 5 $1 initially. The following table shows the profit/loss from the
strategy. The bu
FIN403/IE412
2015-2016
Some Exercises for Practice
1) Three put options on a stock have the same expiration date and strike prices of $55, $60, and $65.
The market prices are $3, $5, and $8, respectively. Explain how a butterfly spread can be created.
Con
FIN 403 / IE 412
Derivative Securities / Financial Engineering
Sample Midterm Exam
Calculators allowed
Documents NOT allowed
Textbook NOT allowed
Computers NOT allowed
You have 2.5 (two and a half) hours to solve the 6 (six) problems below. You should use
Put-Call Parity Formulas
Underlying Asset
Put-Call Parity
c + Ke rT = p + S0
Stock, no dividend
Stock, discrete dividend
Stock, continuous dividend
Currency
c + Ke rT = p + S0 PV0,T (Div)
c + Ke rT = p + S0e qT
r T
c + Ke rT = p + x0e f
c + Ke rT = p + B0
Formula Sheet 1
Fin301 Financial Management
Prof. Aysun Alp
Time Value of Money
P V (single cash f low) =
CT
(1 + r)T
F V (single cash f low) = C0 (1 + r)T
P V (perpetuity) =
C
r
P V (growing perpetuity) =
P V (annuity) =
C
rg
C
1
(1
)
r
(1 + r)T
P V (g
Lecture 6
Valuing Stocks
Fundamental Analysis
How to identify stocks that are mispriced relative to
some measure of true value.
True value can only be estimated, therefore analysts
use models to estimate the fundamental value of a
stock from observable
Aysun Alp
FIN301 Financial Management
Assignment 2
1. White Wedding Corporation will pay a $3.05 per share dividend next year. The
company pledges to increase its dividend by 5.25% per year, indefinitely. If you require
an 11 percent return on your invest
Solutions to Assignment 1
1. Stock account: FVA=800[(1+(.12/12)]^480-1/(.12/12)]=9,441,818.008
Bond account: FVA=400[1+(.08/12)]^480-1/(.08/12)]=1,396,403.133
So the total amount saved at retirement is:
9,441,818.008+1,396,403.133=10,781,221.14
Solving fo
Aysun Alp
FIN301 Financial Management
Assignment 1
1. You are planning to save for retirement over the next 40 years. To do this, you
will invest $800 a month in a stock account and $400 a month in a bond account.
The return of the stock account is expect
Aysun Alp
FIN301 Financial Management
Solutions to Assignment 3
1. Answer the following questions comparing the IRR rule with the NPV rule:
a. What conditions must be satisfied for the IRR rule to result in the same decision as the NPV
rule for independen
In-Class Exercise 1
On September 1 2007 Susan bought a motorcycle of $25000. She paid $1000 down and
financed the balance with 8.4% APR, compounded monthly with a five year loan. She
started the monthly payments exactly one month after the purchase (Octob
Solution to In-Class Exercise 1
On September 1 2007 Susan bought a motorcycle of $25000. She paid $1000 down and
financed the balance with 8.4% APR, compounded monthly with a five year loan. She
started the monthly payments exactly one month after the pur
Aysun Alp
FIN301 Financial Management
Assignment 3
1. Answer the following questions comparing the IRR rule with the NPV rule:
a. What conditions must be satisfied for the IRR rule to result in the same decision as the NPV
rule for independent projects?
b
In-Class Exercise 3
Lean Dining Restaurant is considering the purchase of a $16,000 waffle maker. The waffle
maker has an economic life of four years and will be fully depreciated by the straight-line
method. The machine will produce 2,000 waffles per yea
In-Class Exercise 4
Let x and y be two stocks with E(R)=12% for x and E(R)=20% for y, x=50%, y= 70%, xy =
0.1, where denotes volatility and denotes correlation. You invest 30% of your wealth in
stock x and 70% in stock y.
a) What is the expected return of
In-Class Exercise 5
Find the WACC of William Tell Computers. The total book value of the firm's equity is
$10M. Book value per share is $20. The stock sells for a price of $30 per share. The cost
of equity is 15%. The firm's bonds have a face value of $5M
In-Class Exercise 3
Lean Dining Restaurant is considering the purchase of a $16,000 waffle maker. The waffle
maker has an economic life of four years and will be fully depreciated by the straight-line
method. The machine will produce 2,000 waffles per yea
In-Class Exercise 4
Let x and y be two stocks with E(R)=12% for x and E(R)=20% for y, x=50%, y= 70%, xy =
0.1, where denotes volatility and denotes correlation. You invest 30% of your wealth in
stock x and 70% in stock y.
a) What is the expected return of
Aysun Alp
FIN301 Financial Management
Problem Set 5
1. Suppose you are offered $8,000 today but must make the following payments:
Year
0
1
2
3
4
Cash Flows ($)
$8,000
-4,400
-2,700
-1,900
-1,500
a) What is the IRR of this offer?
b) If the appropriate disc
Solutions to Problem Set 7
Question 1
CAPM states the relationship between the risk of an asset and its expected return. CAPM
is:
E(Ri) = Rf + [E(RM) Rf] i
Substituting the values we are given, we find:
E(Ri) = .05 + (.12 .05)(1.25) = .1375 or 13.75%
Ques
Aysun Alp
Fin301 Financial Management
Problem Set 8 - Cost of Capital
1. XYZ Inc. is considering a project that will result in initial after tax cash savings of $4
million at the end of the first year and these savings will grow at a rate of 4 percent per
Aysun Alp
Fin301 Financial Management
Problem Set 7 - Risk and Return
Question 1
A stock has a beta of 1.25, the expected return on the market is 12 percent, and the riskfree rate is 5 percent. What must the expected return on this stock be?
Question 2
Yo
Solutions to Problem Set 1
1. 100*(1.06)T = 200 Solve for T. T =11.9
2. We need to use annuity formula. If the payment is denoted C, then:
1
1
C
= $8,000 C = PMT = $202.90
48
(0.10 / 12) (0.10 / 12) [1 + (0.10 / 12)]
The monthly interest rate is 0.10/1
Aysun Alp
Fin301 Financial Management
Problem Set 1
1- If you earn 6% per year on your bank account, how long will it take an account with
$100 to double to $200?
2- If you take out an $8,000 car loan that calls for 48 monthly payments starting after 1
mo
Aysun Alp
FIN301 Financial Management
Problem Set 4
Please solve the following end of chapter questions before the due date and upload to
SuCourse. Online submissions only, no hard copies will be accepted.
1. The Starr Co. just paid a dividend of $1.90 pe
Solutions to Problem Set 3
Question 1
a.
Coupon rate = 6%, which remains unchanged. The coupon payments are fixed at
$60 per year.
b.
When the market yield increases, the bond price will fall. The cash flows are
discounted at a higher rate.
c.
At a lower
Aysun Alp
FIN301 Financial Management
Problem Set 6
1. Raphael Restaurant is considering the purchase of a $12,000 souffl maker. The
souffl maker has an economic life of five years and will be fully depreciated by the
straight-line method. The machine wil
Aysun Alp
FIN301 Financial Management
Problem Set 3
Please solve the following end of chapter questions before the due date and upload to
SuCourse. Online submissions only, no hard copies will be accepted.
1. A 30-year Treasury bond is issued with face va