Answers for Part A.
Section A: Answer two questions from this Section and another two from Section B.
Assume (for parts a-d) that the Capital Asset Pricing Model holds. The market
portfolio has annual expected return of 10% and variance of 9%. The risk-fr

FM212 MT2015 Problem Set Solutions
Class 1
1.
The construction of the motel is a good investment if the NPV is positive, which means
that the present value of the benefits is greater than the initial investment:
NPV = $1,300,000 + ($1,500,000/1.10) = +$63

FM212 MT2014 Problem Set Solutions
Class 7
19.
a. No contradiction with market efficiency: taxpaying investors must be indifferent between
both kinds of bond, since theyre equally risky.
b. Strong form.
c. In an efficient market, predictable increases in

FM212 MT2014 Problem Set Solutions
Hand in Problem Set 1
The relevant cash flows for equity valuation are dividends per share:
Time
EPS
DIVps
0
3.52
0
1
3.52(1.25)
0
2
3.52(1.25)2
0
3
3.52(1.25)3
0
1. Therefore the price in year 4 will be:
P4=10.74*p/(0.1

FM212 MT2014 Problem Set Solutions
Hand in Problem Set 2
Under the CAPM all optimal portfolios lie on the Capital Market Line. The slope of the Capital
Market line is equal to 0.4=8%/20%. With this we can find the achievable/optimal expected
return for ea

Option pricing: additional slides
Richard Payne
Cass Business School
December 21, 2014
Richard Payne (Cass Business School)
FM212
December 21, 2014
1 / 19
Put-call parity I
Absence of arbitrage restricts the prices of puts and calls on the same stock. In

FM212 MT2016 Problem Set Solutions
Class 3
7.
Since dividends are paid quarterly, we can value them as a perpetuity using a quarterly
1
discount rate of (1.15) 4 - 1 = 3.556% then, P=$0.5/0.03556=$14.06.
8.
a. We know that g, the growth rate of dividends

FM212 MT2016 Problem Set Solutions
Class 2
4.
Annuity with growth:
a. The present value of Mike Polanskis future salary payments can be written as perpetuity
with growth. Let S t = salary in year t
30
PV =
t =1
30
=
t =1
St
=
(1.08) t
30
t =1
40,000 (1.0

FM212 MT2016 Problem Set Solutions
Class 1
1.
The construction of the motel is a good investment if the NPV is positive, which means
that the present value of the benefits is greater than the initial investment:
NPV = $1,300,000 + ($1,500,000/1.10) = +$63

FM212 MT2016 Problem Set Solutions
Class 4
10. Price of a bond and yield curve
a. Use the following non-arbitrage relation to calculate the implied forward rates:
(1 + rn ) n = (1 + r1 )(1 + f 2 ).(1 + f n )
Year
1
2
3
4
5
Spot
Rate
0.25%
0.50%
0.75%
1.00

Summer 2014 examination
FM212/FM492
Principles of Finance
2013/2014 syllabus and 2011/2012 and 2012/2013 resit candidates
Instructions to candidates
Time allowed: 3 hours
This paper contains six questions: three in Section A and three in Section B. Answer

List of Topics in Part 2
Capital Budgeting and the NPV Rule
Real Options
Payout Policy
Does Debt Policy Matter?
How Much Should A Firm Borrow?
The Many Different Types of Debt
Mergers, Corporate Governance, and Control
Initial Public Offerings
Risk Manage