T1Q1
a.
Payof
840
Bills and calls
780
Stock fund and puts
780 840
ST
b.
The strategy of bills and calls has greater payof when the 840 > ST >780, so it will be more costly.
c.
Bills
Calls
Cost
Profit
840
0
930
-90
Stocks
Puts
Cost
Profit
700
80
906
-126
S

BFF9140: Bank Lending
DRAFT EXAM SOLUTIONS
Section A: (10 x 1.5 mark = 15 marks)
Question 1:
The amount of current assets required to meet a firms long-term minimum needs is
referred to as _ working capital
A
permanent
B
temporary
C
net
D
gross
Question 2

T4Q1
a.
D4 = 10 x 1.153 x 1.12 x 0.5 = $8.06
P3 = 8.06 / (1.4 x (8% - 5%) + 5%) = $87.6
V = $87.6 / (1.4 x (8% - 5%) + 5% + 1)3 = $67.28
b.
Multistage growth models allow dividends per share to grow at several different rates as the firm
matures. Many ana

BK Ch 15: Q10
a. A 3-year zero coupon bond with face value $100 will sell today at a yield of 6% and a
price of: $100/1.06 =$83.96
Next year, the bond will have a two-year maturity, and therefore a yield of 6% (from next
years forecasted yield curve). The

BKM Ch 22 Q13:
a. 120 x 1.06 = $127.2
b. The stock price falls to: 120 x (1 0.03) = $116.4
The futures price falls to: 116.4 x 1.06 = $123.384
The investor loses: (127.20 123.384) x 1,000 = $3,816
c. The percentage loss is: $3,816/$12,000 = 0.318 = 31.8%

T10Q1
(a) Because K = 100, so payoffs of call at maturity are:
Cu = maxcfw_ uS K, 0 = 10 and Cd =maxcfw_dSK,0=0.
Initial cost of the portfolio would be:
S + B = 100 + B,
since the portfolio is replicated consisting of units of the stock and borrowing/
inv

T6Q1.
a) Technical analysis concentrates on the security price and uses this data to predict its future price.
Fundamental analysis focuses on economic factors.
b) It is not enough to do a good analysis of a firm; you can make money only if your analysis

T3Q1
a.
The basic procedure in portfolio evaluation is to compare the returns on a managed portfolio
to the return expected on an unmanaged portfolio having the same risk, using the SML. That
is, expected return is calculated from: E(r p) = rf + (E(rM) -

T2Q1
a.
5% + (12% - 5%) x 1 = 12%
b.
Since the = 0, there is no systematic risk. The stocks expected rate of return is 5%.
c.
The stocks fair expected rate of return is:
5% + -0.5 x (12% - 5%) = 1.5%
However the actually expected rate of return next year

BKMCh 20: Q7
a.
Put-call parity: P = C S0 + [X/(1 + rf)T] = 10 100 + [100/(1.1)1/4] = $7.65
b.
Purchase a straddle, i.e., both a put and a call on the stock. The total cost of the straddle is: $10 +
$7.65 = $17.65. This is the amount by which the stock wo

Week 1
What is finance
1. Financial system
The financial system functions to facilitate the flow of fund between
deficit & surplus units through the interaction of financial institutions,
instruments & markets.
2. Definitions
A deficit unit saves less t