Fi 302 Test 4

Front 1

Question 1 (AP11b)

Back 1

(2nd - 1st / 3rd) * 4th

Front 2

Question 2 (AP1a)

Back 2

ROR(A required) = ROR(R-F) + Beta(A) * [(ROR(M) - ROR(R-F)]

ROR(B required) = ROR(R-F) + Beta(B) * [(ROR(M) - ROR(R-F)]

If expected > required, BUY

Front 3

Question 3 (AP8)

Back 3

1. ROR(R-F): 1st + 2nd

2. ROR(A req.) = ROR(R-F)

3. OLD ROR(req.) = ROR(R-F) + BETA * Market risk premium

4. I.V. = div(1 + g)/ (old ROR req.) - g

5.Find new ROR(req.) = ROR(R-F) + BETA * Market risk premium

6.New I.V. = div(1 + new g)/ (old ROR req.) - new g

7. % (new - old / old)

Front 4

Question 4 (AP8)

Back 4

1. Clear calculator (2nd, DATA, 2nd Clear WRK)

2. Press 2nd DATA and enter X and Y values (X is market)

3. Press 2nd STAT, 2nd SET and get LIN to appear

4. Find a and b

5. ROR equilibrium = a + b(market return)

6. ROR(R-A) = company return -ROR equilibrium

Front 5

Question 5 (FF2) : Three sources of financial value

Back 5

1. time value

2. transformation value

3. arbitrage

Front 6

Question 5 (MB22) : Futures and Options, Four characteristics that describe these securities

Back 6

Futures...

- are free but you must deposit collateral to validate the security

Options...

- 2 types for every 1 underlying asset, each of those 2 has 1 long/1 short

- short position entails an obligation only when the long side chooses to exercise the contract

- long position entails a right, not an obligation, to either exercise or cash out of the contract

Front 7

Question 5 (MB26): 3 primary reasons for the explosive growth during recent years in the proportion of total NYSE trades that results from program trading

Back 7

- Most large trades are not by households

- Institutional funds have grown dramatically

- Technological advancements of recent decades have made sophisticated trading more possible

Front 8

Question 6 (AP6b)

Back 8

1. R(req) = interest rate + beta(market portfolio risk premium)

2. I.V. = div(1 + g) / R(req) - g

3. we only buy if V sub 0 > price

Front 9

Question 6 (AP9)

Back 9

1. ROR(A required) = ROR(R-F) + Beta(A) * [(ROR(M) - ROR(R-F)]

2. ROR(M) - ROR(R-F) = market risk premium

3. ROR(R-F) = Real(R-F) * Inflation Premium

4. calculate ROR(required)

5. Find I.V. = div(1 + g) / ROR(req.) - r

6. Market Risk Premium + increase in B.P.

7. calculate new ROR(required) = ROR(R-F) + Beta * [new MRP]

8. Calculate new I.V.

9. new I.V. - old I.V. / old I.V.

Front 10

Question 6 (AP15)

Back 10

ROR(R-F) : real rate + inflation premium

- Calculate for two year

- Calculate for four year

- Calculate for twenty year

[real rate stays constant]

[Inflation premium = year 2 + year 1 /2 , etc.]

Front 11

Question 7 (AP5b)

Back 11

1. Constant Dividend Growth Model to find r(expected) = div(1 + g) / r (exp.) - g

2. solve for r(expected)

3. ROR(required) = ROR(R-F) + Beta * Market Risk Premium

BUY if ROR expected > ROR required

Front 12

Question 8 (CC2)

Back 12

1. r(req.) = ST r(R-F) + beta(risk premium for M.P.)

2. r(WACC) = % debt * cost of debt(1 - tax rate) + ( 1 - debt %) x r(req.)

3. NPV of perpetuity = CF/r(WACC) - initial outflow

Front 13

Question 9 (TR12)

Back 13

- The efficient frontier is the risk-return profile that contains the set of all dominant portfolios comprised possibly of allsecurities

- The security market line passes through two points with coordinates (beta, rate of return) equal to (0, risk-free rate) and (1,expected market return)

- The capital market line passes through two points with coordinates (standard deviation, rate of return) equal to (0, risk-free rate) and (market standard deviation, expected market return)

Front 14

Question 9 (TR14)

Back 14

high beta has highest req. risk premium

Front 15

Question 9 (TR41)

Back 15

loanable funds theory of interest-

when an economic contraction causes a reduction in the availability of private credit market securities then, ceteris paribus, the equilibrium risk-free securities increases

Front 16

Question 9 (MB20)

Back 16

Characteristics of Hedgers:

- movements in the commodity price have modest effect on the overall outcome

Front 17

Question 10 (TQ17)

Back 17

1. Present Value SP2

2. one year deliverable price / one year disc. rate

3. P.V. of the two stocks = price 1 + price 2

4. Abitrage profit = high minus low (of part 2 and part 3)

5. If the futures market position is LOWER than the stock market price, go long (buy) in futures market and go short (sell) in stock market. Note that if we sell the two stocks, we will have some cash on hand (put that cash in an interest bearing acct.)

[BUY LOW AND SELL HIGH]

Front 18

Question 11 (FT3a) [SHORT VERSION]

Back 18

1. Revenue of first month spot sale:

# of bushels * price per bushel

2. Profit/Loss on Short Futures Position:

profit = # contracts * bushels per contract (beg. futures price - ending futures price)

3. Total revenue:

spot sale + futures price

Front 19

Question 12 (FT4c)

Back 19

1. pretax profit margin = rev - cost / rev,

solve for revenue

2. convert rev into bhat

rev * bhat conversion rate = amt in bhat

3. Find new price of bhat-

3a. How many dollars for every 1 bhat

3b. multiply by the depreciation rate

4. Find revenue in terms of new price of that

4a. multiply rev. in bhat * new conversion rate

5. Find new pretax margin using product of #4 as revenue

Front 20

Question 13 (FT1b)

Back 20

1. margin = %margin * quality * futures price @ begin

2. profit on long = quantity (end price - begin price)

3. rate of return = profit/initial investment

Front 21

Question 13 (FT2b)

Front 22

Question 13 (FT5c)

Back 22

1. margin = %margin * quality * futures price @ begin

2. profit on long = quantity (end price - begin price)

3. Calculate begin in terms of "peso"

4. Calculate end using product of 3 * (1- depr.)

5. profit on short = quantity(begin-end)

6. rate of return = profit on short / margin

Front 23

Question 13 (FT6b)

Back 23

[Note: to send the subsidiary pesos, they must buy them 1st. That means they must go long]

1. Beginning futures price... 1 peso = x

2. Ending futures price... 1 peso = x * (1 + appreciation rate)

3. profit on long = quantity price (end futures price - begin futures price)

Front 24

Question 14 (DS7b)

Back 24

1. Invested capital = cost to buy call + cost to buy put

2. If price of the stock is within (product 1) of the strike price on the date of expiration, then the straddle loses money. At prices less than (strike - product 1) , the put generates a net profit. At prices about (strike + product 1) the call generates a net profit

Front 25

Question 14 (DS19a)

Back 25

1. Initial cash flow = -stock price + option price

2. Ending price of stock = stock price * (1 + increase)

3. ROR = (product 2 + div - product ) / product 1

Front 26

Question 15 (DS22): If Put

Back 26

1. Initial cost = stock price + option price

2. Target end wealth = initial cost * (1 + ROR)

3. End Wealth = product 2 + max [0, strike - [product 2]

4. if payoff 0 = product 2

Front 27

Question 15 (DS22): If Call

Back 27

1. Initial investment = stock price + option price

2. Target end wealth = initial cost * (1 + ROR)

3. End Wealth = product 2 + max [0, strike - [product 2]

4. if payoff 0 = product 2