The University of Hong Kong
School of Economics and Finance
FINA0304/2312Advanced Corporate Finance
Assignment 4
Due: November 26, 2015
1. Acme Industries is considering building a plant. After an initial investment of $100
million, the plant will be comp

Assignment 4 Suggested Solutions:
Q1.
a. The utility function is composed of Perquisite Consumption (F) and the Mangers
Wealth (W), which can be represented by U(F, W). The tangent of the red line
provides the highest utility to the manager.
W
U(F, W)
F
b

Assignment 3 Suggested Solution
Q1a.
The binomial tree of firms value
208.128
180-6.56 = 173.44
(Bond's Value =
106.56)
(Bond's Value = A)
138.752
150
(Bond's Value =
106.56)
(Bond's Value = C)
136.128
120-6.56 = 113.44
(Bond's Value =
106.56)
(Bond's Val

The University of Hong Kong
School of Economics and Finance
FINA0304/FINA2312Advanced Corporate Finance
Assignment 1
Due: October 5, 2015
1. You have a cash obligation of $132,240 to be made at the end of year 5. Show how you
can use coupon bonds with a c

Lecture note 3
Valuation of Stocks
Present Value of Common Stocks
Dividends vs. Capital Gains
For a single holding period,
Div1 + P1
P0 =
1+ r
where Div1 and P1 are the dividend and price
at time 1, respectively.
An investor valuing the stock in the nex

Lecture note 4
Pricing Derivatives and Options
Arbitrage and Arbitrage Opportunities
An arbitrage is a self-financing investment
strategy that generates either (i) a riskless
profit today and no future cash obligations or
(ii) zero immediate cash flow an

Assignment 2 Suggested Solution
Q1.
Consider the Put-Call Parity:
L. H. S = C P = 9 18 = 9
130
= 7.6415 9
1 + 6%
Arbitrage Opportunity exists as Put-Call Parity does not hold
In order to earn this opportunity, we construct the following portfolio:
R. H. S

The University of Hong Kong
School of Economics and Finance
FINA0304/FINA2312Advanced Corporate Finance
Assignment 3
Due: November 12, 2015
1. Suppose that the current market value of a rm is 150. The rm lasts for two periods.
The rate of return on the as