Solutions to Problem Set 10
Corporate Finance, Sections 001 and 002
1. (a) The position that produces prots if IBM increases while limiting losses if IBM
declines comes from buying a call. Buying an at the money (E = $150 ) call
for $15 produces:
Stock pr

Finance 611: Corporate Finance
Capital Asset Pricing Model
Action
We are going to slow down.
Last two cases dropped from the schedule (Twitter IPO & Open Table
Acquisition).
Less time spent on cases. Presenters/discussants each get 10 minutes.
We will

Finance 611: Corporate Finance
Capital Structure
The Capital Structure Question
So far we tried to answer the following
The next question:
question:
Which projects should the firm invest in
to maximize value?
How should the firm raise the capital
nece

Finance 611: Corporate Finance
Risk Management
Derivatives: What are they?
A derivative security is a security whose cash flows are derived
from the market prices of other securities or assets.
o
o
Derivatives give no ownership or control rights.
A deriv

Finance 611: Corporate Finance
Financial Options
Option Combinations: Portfolio Insurance
100
75
Payoff
Stock
+ Put
Call
+ TBills
50
25
0
0
25
50
75
100
-25
Stock Price
PROF. JULES H. VAN BINSBERGEN & PROF. MICHAEL R. ROBERTS
2
Put-Call Parity
We have s

Finance 611: Corporate Finance
Real Options
Capital Budgeting
How do we make investment decisions?
Compare costs and benefits: accept if benefits > costs
o We have developed a set of tools to value the cash-flows of projects:
NPV, FCF, CAPM, WACC, APV
o

FNCE 611: Corporate Finance
Professors Jules van Binsbergen and Michael Roberts
Midterm
Name:
Section:
Instructor:
Question
Maximum
1
20
2
20
3
20
4
20
5
20
Total
Student Score
100
Instructions:
Please read each question carefully
Round all numbers to t

FNCE 611: Corporate Finance
Professors Jules van Binsbergen and Michael Roberts
Midterm
Name:
Solutions
Section:
Instructor:
Question
Maximum
1
20
2
20
3
20
4
20
5
20
Total
Student Score
100
Instructions:
Please read each question carefully
Round all nu

Ameritrade!
David Cao
Jane Xuejing Li
Mike Xu
Dongye Zhang
KNOWLEDGE FOR ACTION
Background!
Ameritrade was a deep-discount brokerage rm that planned to invest
heavily in technology and advertising to increase customer base and brand
awarenes

Finance 611: Corporate Finance
Risk and the Cost of Capital
Measuring Returns
Recall the definition of the total return:
R1
Div1 P1 P0
P0
P0
Stock returns are highly variable over time: General Motors
Year
2000
2001
2002
2003
2004
2005
2006
2007
2008
S

Solutions to Problem Set 1
Corporate Finance, Sections 001 and 002
1. (i) EAIR = .08
(ii) EAIR = (1 + 0.08/365)365 1 = .08328
(iii) EAIR = e.08 1 = .08329
Continuous compounding implies the highest EAIR, annual compounding the lowest.
In general, the grea

Solutions to Problem Set 9
Corporate Finance, Sections 001 and 002
1. (a) Recall that the asset beta, A is the beta of the underlying assets of the rm.
Since the rm is a portfolio of debt and equity,
A =
D
E
D + E
V
V
(1)
where V is the total value of the

Solutions to Problem Set 8
Corporate Finance, Sections 001 and 002
1. (a) The risk premium is given by
RM Rf = .12 .06 = .06
(b) The equilibrium expected return of a risky asset is given by:
Ri = R f + i ( RM R f )
The expected return for the securities g

Solutions to Problem Set 7
Corporate Finance, Sections 001 and 002
1. (a)
i. The investor should choose security 2 because security 2 has a higher expected
return than security 1 (R2 = .16 while R1 = .10).
ii. The investor should choose security 1 because

Solutions to Problem Set 6
Corporate Finance, Sections 001 and 002
1. Because the proceeds from Year 1 are reinvested in Year 2 etc., the proper summary
measure for returns is the geometric average of the annual returns. Thus, the geometric
average return

Solutions to Problem Set 5
Corporate Finance, Sections 001 and 002
1. (a) The plowback ratio is equal to 1 (Div 1 /EPS1 ). We can calculate this number
from the dividend yield Div1 /P0 and the price-earnings ratio P0 /EPS1 .
b=1
Div1 P0
Div1
=1
= 1 .0163(

Solutions to Problem Set 4
Corporate Finance, Sections 001 and 002
1. (a) The stock price can be estimated using the dividend growth model as follows:
P0 =
EPS1 (1 b)
r b ROE
where b equals the plowback ratio and r equals the required rate of return. Thus

Solutions to Problem Set 3
Corporate Finance, Sections 001 and 002
1. (a) Because the yield to maturity on similar securities is 8%, you will pay a premium
for a 10% coupon bond such that the yield to maturity for both securities are
equal. Since interest

Solutions to Problem Set 2
Corporate Finance, Sections 001 and 002
1. (a) The yield on the bond (assuming annual compounding) is:
r = (1000/800)1/5 1 = .04564
(b) With a yield of 4.564%, the present value (that is, the price) of a three year
zero-coupon b

Fall 2014
Corporate Finance
Prof. Jules van Binsbergen and Prof. Michael Roberts
Cost of Capital at Ameritrade
Read and prepare:
Cost of Capital at Ameritrade
Big picture question:
What cost of capital should Ameritrade use in evaluating its expansion?
Qu