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fundamentals of corporate finance 10th

Questions and Answers of Fundamentals Of Corporate Finance 10th

Put–Call Parity An equity sells for €40 per share. The continuously compounded risk-free rate is 8 per cent per year. A call option with one month to expiration and a strike price of €45 sells
Put–Call Parity BP plc shares are currently selling for£4.29 per share. A put option with an exercise price of£4.40 sells for £0.25 and expires in three months. If the risk-free rate of interest
Is the share price reaction to the Volkswagen scandal explained by the efficient markets hypothesis? If so, explain why.
How do we calculate the expected return on a security?
In words, how do we calculate the variance of the expected return?
How do we calculate the expected return on a portfolio?
Is there a simple relationship between the standard deviation on a portfolio and the standard deviations of the assets in the portfolio?
What are the two basic parts of a return?
Under what conditions will a company’s announcement have no effect on common share prices?
What are the two basic types of risk?
What is the distinction between the two types of risk?
What happens to the standard deviation of return for a portfolio if we increase the number of securities in the portfolio?
What is the principle of diversification?
Why is some risk diversifiable? Why is some risk not diversifiable?
Why can’t systematic risk be diversified away?
What is the systematic risk principle?
What does a beta coefficient measure?
True or false: the expected return on a risky asset depends on that asset’s total risk. Explain.
How do you calculate a portfolio beta?
If an investment has a positive NPV, would it plot above or below the SML? Why?
What is meant by the term cost of capital?
Expected Return and Standard Deviation This problem will give you some practice calculating measures of prospective portfolio performance. There are two assets and three states of the economy:State
Portfolio Risk and Return Using the information in the previous problem, suppose you have £20,000 total. If you put £15,000 in Equity A and the remainder in Equity B, what will be the expected
Risk and Return Suppose you observe the following situation:Security Beta Expected return(%)Cooley NV 1.8 22.00 Moyer NV 1.6 20.44 If the risk-free rate is 7 per cent, are these securities correctly
CAPM Suppose the risk-free rate is 8 per cent. The expected return on the market is 16 per cent. If a particular equity has a beta of 0.7, what is its expected return based on the CAPM? If another
Determining Portfolio Weights What are the portfolio weights for a portfolio that has 200 shares of Equity A that sell for £4.50 per share and 100 shares of Equity B that sell for £2.70 per share?
Portfolio Expected Return You own a portfolio that has€2,950 invested in Equity A and €3,700 invested in Equity B. If the expected returns on these equities are 11 per cent and 15 per cent,
Portfolio Expected Return You own a portfolio that is 60 per cent invested in Equity X, 25 per cent in Equity Y, and 15 per cent in Equity Z. The expected returns on these three equities are 9 per
Portfolio Expected Return You have £10,000 to invest in an equity portfolio. Your choices are Equity X with an expected return of 14 per cent and Equity Y with an expected return of 10.5 per cent.
Calculating Expected Return Based on the following information, calculate the expected return:State of economy Probability of state of economy Portfolio return if state occurs Recession 0.25 −0.08
Calculating Expected Return Based on the following information, calculate the expected return:State of economy Probability of state of economy Portfolio return if state occurs Recession 0.25 −0.05
Calculating Returns and Standard Deviations Based on the following information, calculate the expected return and standard deviation for the two equities:Rate of return if state occurs State of
Calculating Expected Returns A portfolio is invested 25 per cent in Equity G, 55 per cent in Equity J and 20 per cent in Equity K. The expected returns on these equities are 8 per cent, 15 per cent
Returns and Variances Consider the following information:Rate of return if state occurs State of economy Probability of state of economy Equity AEquity BEquity CBoom 0.35 0.07 0.15 0.33 Bust 0.65
Returns and Standard Deviations Consider the following information:State of economy Probability of state of economy Rate of return if state occurs Equity AEquity BEquity CBoom 0.05 0.30 0.45 0.33
Calculating Portfolio Betas Your equity portfolio has 25 per cent in L’Oréal, 20 per cent in Carrefour, 15 per cent in Unicredit, and 40 per cent in LVMH Moët Hennesey Louis Vuitton. The betas
Calculating Portfolio Betas You own a portfolio equally invested in a risk-free asset and two mining stocks, Vedanta Resources and Eurasian Natural Resources. The beta of Vedanta is 2.63 and the
Using CAPML’Oréal has a beta of 0.65, the expected return on the CAC 40 Index is 8 per cent, and the risk-free rate is 1.5 per cent. What is the expected return of L’Oréal?
Using CAPMThe German chemicals firm, Lanxess AG, has an expected return of 13 per cent, the risk-free rate is 1.5 per cent, and the market risk premium is 8.5 per cent.What is the beta of Lanxess?
Using CAPM An equity has an expected return of 13.5 per cent, its beta is 1.17, and the risk-free rate is 5.5 per cent. What must the expected return on the market be?
Using CAPM Banco de Sabadell SA has an expected return of 12.13 per cent, its beta is 1.07, and the expected return on the market is 11.5 per cent. What must the riskfree rate be?
Using the SML Asset W has an expected return of 15.2 per cent and a beta of 1.25. If the risk-free rate is 5.3 per cent, complete the following table for portfolios of Asset W and a risk-free asset.
Using CAPM An equity has a beta of 1.35 and an expected return of 16 per cent. A risk-free asset currently earns 4.8 per cent.(a) What is the expected return on a portfolio that is equally invested
Reward-to-Risk Ratios Equity Y has a beta of 1.4 and an expected return of 18.5 per cent. Equity Z has a beta of 0.80 and an expected return of 12.1 per cent. If the riskfree rate is 2 per cent and
Reward-to-Risk Ratios In the previous problem, what would the risk-free rate have to be for the two equities to be correctly priced?
Portfolio Returns Using information from the previous chapter on capital market history, determine the return on a portfolio that is equally invested in large UK company equities and small UK company
Portfolio Returns and Deviations Consider the following information about three equities:Rate of return if state occurs State of economy Probability of state of economy Equity AEquity BEquity CBoom
Analysing a Portfolio You want to create a portfolio equally as risky as the market, and you have £1,000,000 to invest. Given this information, fill in the rest of the following table:Asset
Systematic versus Unsystematic Risk Consider the following information about Equities I and II:Rate of return if state occurs State of economy Probability of state of economy Equity I Equity II
SML Suppose you observe the following situation:Return if state occurs State of economy Probability of state Equity AEquity BBust 0.25 −0.10 −0.30 Normal 0.50 0.10 0.05 Boom 0.25 0.20 0.40(a)
Go to Yahoo! Finance and download the ending monthly equity prices for Vodafone for the last 60 months. Use the adjusted closing price, which adjusts for dividend payments and stock splits. Next,
Beta is often estimated by linear regression. A model often used is called the market model, which is In this regression Rt is the return on the equity and Rft is the risk-free rate for the same
Use the market model to estimate the beta for Vodafone using the last 36 months of returns (the regression procedure in Microsoft Excel is one easy way to do this). Plot the monthly returns on
When the beta of an equity is calculated using monthly returns, there is a debate over the number of months that should be used in the calculation. Rework the previous questions using the last 60
Compare your beta for Vodafone with the beta you find on Yahoo!Finance. How similar are they? Why might they be different?
Trading with Futures: Marking to Market You are long 10 gold futures contracts, established at an initial settle price of €1,000 per ounce, where each contract represents 100 ounces. Over the
Describe how the Miller–Orr model works.
What are the basic components of the terms of sale if a firm chooses to sell on credit?
What is the basic goal of inventory management?
What does the EOQ model determine for the firm?
Cash Management Policy Rework Problem 17.16 assuming the following:(a) Wildcat maintains a minimum cash balance of €45 million.(b) Wildcat maintains a minimum cash balance of €15 million.(c)
What is hedging?
Why do firms place greater emphasis on hedging now than they did in the past?
What is a risk profile? Describe the risk profiles with regard to oil prices for an oil producer and a petrol retailer.
What can a firm accomplish by hedging financial risk?
What is a forward contract? Describe the pay-off profiles for the buyer and the seller of a forward contract.
Explain how a firm can alter its risk profile using forward contracts.
What is a futures contract? How does it differ from a forward contract?
What is cross-hedging? Why is it important?
What is a swap contract? Describe three types.
Describe the role of the swap dealer.
Explain the cash flows in Figure 20.9.
Suppose that the unhedged risk profile in Figure
sloped down instead of up. What option-based hedging strategy would be suitable in this case?
What is a futures option?
What is a caption? Who might want to buy one?
Futures Contracts Suppose Golden Grain Farms (GGF)expects to harvest 50,000 bushels of wheat in September. GGF is concerned about the possibility of price fluctuations between now and September. The
Options Contracts In the previous question, suppose that September futures put options with a strike price of £2 per bushel cost £0.15 per bushel.Assuming that GGF hedges using put options,
Swaps Borderline Agriculture, a distributor of food and food-related products to emerging markets, has announced it has signed an interest rate swap. The interest rate swap effectively converts the
Futures Quotes Suppose you purchased a June Live Cattle futures contract on 4 March at $1.00 per lb. What would your profit or loss have been if Live Cattle prices turn out to be $1.20 per lb at
Futures Quotes Suppose you sell five April high grade copper futures contracts on 4 March at $350 each. What will your per contract profit or loss be if copper prices turn out to be $400 at
Put and Call Pay-offs Suppose a financial manager buys call options on 35,000 barrels of oil with the same exercise price of £120 per barrel. She simultaneously sells a put option on 35,000 barrels
Hedging with Futures Suppose today is 16 April, and your firm produces chocolate and needs 75,000 tonnes of cocoa in July for an upcoming promotion. You would like to lock in your costs today because
Hedging with Futures Suppose today is 4 March, your firm produces chocolate and needs 75,000 tonnes of cocoa in July for an upcoming promotion. The July cocoa futures price is £1,450 per contract of
Interest Rate Swaps ABC Company and XYZ Company need to raise funds to pay for capital improvements at their manufacturing plants. ABC Company is a wellestablished firm with an excellent credit
Financial Engineering Suppose there were call options and forward contracts available on coal, but no put options. Show how a financial engineer could synthesize a put option using the available
Hedging You are the finance director of a British company, which is expecting a payment of €200 million at the end of September and wishes to hedge against currency risk. However, the nearest
Swaps Consider two firms, Yakwanza plc and Yamwisho plc. Yakwanza plc has a better credit rating and can borrow cheaper than Yamwisho plc in both fixed- and floating-rate markets. Specifically,
Swaps Construct a swap in which both Yakwanza plc and Yamwisho plc (see Question 20.11) can exploit a comparative advantage belonging to one of the firms.Your answer should include a swap diagram and
What is the monthly mortgage payment on Finn’s mortgage?
What is the most significant risk Jennifer faces in this deal?
How can Jennifer hedge this risk?
Suppose that in the next 3 months the market rate of interest rises to 9 per cent.(a) How much will Ian be willing to pay for the mortgage?(b) What will happen to the value of Treasury bond futures
Suppose that in the next 3 months the market rate of interest falls to 7 per cent.(a) How much will Ian be willing to pay for the mortgage?(b) What will happen to the value of T-bond futures
Are there any possible risks Jennifer faces in using Treasury bond futures contracts to hedge her interest rate risk?
What is a merger? How does a merger differ from other acquisition forms?
What is a takeover?
Why is taxation important in mergers and acquisitions?
Why are accounting rules important in mergers and acquisitions?
What are the relevant incremental cash flows for evaluating a merger candidate?

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