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fundamentals of investments valuation

Questions and Answers of Fundamentals Of Investments Valuation

Identify the most active options traded on Microsoft (MFST).
Suppose you bought 100 shares of stock at $50 per share. If the stock price goes up to $60 per share, what is the percentage return on your investment? If, instead, the stock price falls to $40 per
You invested $1,000,000 with a hedge fund that has a standard 2/20 fee structure and a high-water mark provision. Suppose the returns over the first two years are −5 percent and 25 percent,
Tango Corp. has made an offer to acquire Cash Corp. The deal specifies that one share of Tango will be exchanged for two shares of Cash. Tango is currently trading at $50 per share, and, after a
Centerwire Capital Partners is considering an investment in Glass Technologies. Glass has an EBITDA of $12.2 million, and Centerwire determines that similar deals have recently closed at a 5.5 times
Scenic Ventures is considering an investment in a start-up firm offering ecotourism excursions in Costa Rica. Scenic Ventures estimates that, if the venture is successful, the ecotourism company will
You are considering a rental property investment. You estimate gross potential income of $100,000 per year. You expect, however, an average vacancy rate of 5 percent. Operating costs will average
Heating oil futures contracts are traded on the New York Mercantile Exchange (NYM), a division of the CME Group. The standard contract size for heating oil futures is 42,000 gallons per contract. You
High Rollers Hedge Fund has a standard 20 percent performance fee. If High Rollers were able to raise $10 million and generate a 25 percent return in its first year of operation, what would be the
Arm Technologies has offered to purchase Hammer Group by exchanging one share of Arm for three shares of Hammer. Arm is currently trading at $50 per share and Hammer is currently selling for $15 per
Private Partner Ventures is a private equity fund that just formed a new $1 billion fund. It recently made its first capital call for $300 million. If it uses a standard 2/20 fee structure, what is
Assume Cambridge Ventures raises $10,000,000 for a private equity fund with a one-year life. The fund has a hurdle rate of 6 percent, above which it earns a carried interest of 20 percent. If
A company with an EBITDA of $2.9 million was recently acquired for $18.6 million. What is the valuation multiple implied in this price?
You have decided to use futures contracts to invest in silver at a settle price of $15 per ounce. Each futures contract has a standard size of 5,000 troy ounces and an initial margin requirement of
Given the information in the previous problem, what is the leverage factor associated with these contracts. If silver rises to $17 per ounce, what is your total percentage return?Problem 17.6You have
Assume the spot price of wheat is $3.17 per bushel. The appropriate interest rate is 3 percent, and there are no storage costs. Under spot-futures parity, calculate the price for a six-month wheat
A potential investment property has an NOI of $425,000 and a capitalization rate of 15 percent. Using the income approach, calculate the value of this investment property.
A real estate investment company just bought an office building. The company estimates that the building will generate $945,000 in net operating income annually. If the building was purchased for
Two years ago, you invested $750,000 with a market-neutral hedge fund manager. The fee structure is 2/20, and the fund has a high-water mark provision.Suppose the first year the fund manager lost 10
Robbin Partners, a private equity fund, has identified Nest Corp. as a potential acquisition target. Nest has an EBITDA of $28 million. Robbin knows that these similar deals have recently
Vista Venture Partners is considering an investment in a start-up firm that has developed a new technology for streaming data. If the venture is successful, Vista estimates it will be able to grow
In isolation, alternative investments are extremely volatile. So, why might even a moderately conservative investor consider these investments for her portfolio?
Discuss why evaluating the performance of hedge funds and private equity funds is difficult.
Briefly explain how a high-water mark prevents hedge fund managers from manipulating their performance fee.
What are the advantages and disadvantages of a funds of funds approach to investing in hedge funds?
Briefly explain why investors in private equity funds will often demand a clawback provision with respect to carried interest.
Why do venture capital funds often use convertible preferred stock in their investments?
Define contango in futures markets and discuss how it creates a potential roll cost.
Describe the relative disadvantages of spot positions versus futures contracts for investing in commodities.
What are the disadvantages of investing in exchange-traded notes (ETNs) as compared to exchange-traded funds (ETFs)?
What are the risks of investing in cryptocurrency?
In our previous example (Example 2.3), suppose the maintenance margin was 40 percent. At what price per share would you have been subject to a margin call?Example 2.3A year ago, you bought 300 shares
You shorted 5,000 shares of Layton Industries at a price of $30 per share. The initial margin is 50 percent, and the maintenance margin is 40 percent. What does your account balance sheet look like
Review current money market rates.
What are the major risk premiums that impact the nominal interest rate?
Suppose you purchase a $1,000 TIPS on January 1, 2024. The bond carries a fixed coupon of 1 percent. Over the first two years, semiannual inflation is 2 percent, 3 percent, 1 percent, and 2 percent,
Both Starcents and Jpod have the same return standard deviation of 20 percent, and Starcents and Jpod returns have zero correlation. What is the minimum attainable standard deviation for a portfolio
Read recent news headlines for Best Buy (BBY).
Find the beta and risk premium for the Vanguard International Value Fund (VTRIX).
The Sharpe portfolio performance measure for Portfolio Q is:a. .45.b. .89.c. .30.d. .57.A pension fund administrator wants to evaluate the performance of four portfolio managers. Each manager
A portfolio manager believes her $100 million stock portfolio will have a 10 percent return standard deviation during the coming week and that her portfolio’s returns are normally distributed. What
Using Figure 14.1, answer the following questions:a. What was the settle price for July 2022 coffee futures on this date? What is the total dollar value of this contract at the close of trading for
In Figure 14.1, locate the gold and wheat contracts. Where are they traded? What are the contract sizes for the gold and wheat contracts and how are their futures prices specified?Figure 14.1 Futures
Going back to the Ned Kelley Hedge Fund in our previous example, what loss level might we expect over six months with a probability of .17?Example 13.11The Ned Kelley Hedge Fund focuses on investing
For the Ned Kelley Hedge Fund specified in our previous examples, what is the expected loss for the coming year with a probability of 5 percent?Example 13.12Going back to the Ned Kelley Hedge Fund,
For the Ned Kelley Hedge Fund specified in our previous examples, what is the expected loss for the coming month with a 1 percent probability?Example 13.13For the Ned Kelley Hedge Fund, what is the
a. Explain what is meant by a long position in futures and what is meant by a short position in futures.b. Suppose a hedger employs a futures hedge that is two-thirds the size of the underlying
In Figure 14.1, locate the soybean contract with the greatest open interest. Explain the information provided.Figure 14.1 Futures Contracts Futures Prices (June 3, 2022) Metal & Petroleum
a. What is a forward contract?b. What is a futures contract, and why is it different from a forward contract?c. What is a futures price?
Review the list of futures contracts traded on the exchanges.
Suppose you purchase 10 orange juice contracts today at the settle price of $1 per pound. How much do these 10 contracts cost you? If the settle price is lower tomorrow by 2 cents per pound, how much
Which of the following statements is true regarding the distinction between futures contracts and forward contracts?a. Futures contracts are exchange-traded, whereas forward contracts are
Examine the current fair value of major world equity indexes.
There is a futures contract on a stock index, which is currently selling at $200 per share. The contract matures in two months; the risk-free rate is 5 percent annually. The stocks in the index do
In which of the following ways do futures contracts differ from forward contracts?I. Futures contracts are standardized.II. For futures, performance of each party is guaranteed by a
After an extensive analysis of political currents in Central and South America, you conclude that the political situation will stabilize. As a result, you believe that coffee prices in the future
Pick a commodity futures contract and identify its cheapest-to-deliver option.
a. What are the three essential things you should know about a futures trading account?b. What is meant by initial margin for a futures position? What is meant by maintenance margin for a futures
Suppose you have an inventory of 1.8 million pounds of soybean oil. Describe how you would hedge this position.
a. What is the spot price for a commodity?b. With regard to futures contracts, what is the basis?c. What is an inverted market?d. What is the spot-futures parity condition?
Initial margin for a futures contract is usually:a. Regulated by the Federal Reserve.b. Less than 2 percent of contract value.c. In the range between 2 percent and 5 percent of contract
You need to buy 360,000 pounds of orange juice concentrate in three months. How can you hedge the price risk associated with this planned purchase? One orange juice contract calls for delivery of
a. What is a cross-hedge?b. What are the basic inputs required to calculate the number of stock index futures contracts needed to hedge an equity portfolio?c. What are the basic inputs required to
Suppose your company will receive payment of £15 million in three months, at which time your company will convert the British pounds to U.S. dollars. What is the standard futures contract size for
A silver futures contract requires the seller to deliver 5,000 troy ounces of silver. An investor sells one April silver futures contract at a price of $15 per ounce, posting an $8,400 initial
Suppose we see silver spot prices are $23 per ounce. The risk-free rate is 4 percent per year. If a silver futures contract matures in three months, what should the futures price be?
Which of the following statements is false about futures account margin?a. Initial margin is higher than maintenance margin.b. A margin call results when account margin falls below maintenance
Suppose you are convinced that the Dow stocks are going to skyrocket in value. Consequently, you buy 20 Mini-DJIA futures contracts maturing in six months at a price of 32,900. Suppose that the Dow
Which of the following contract terms changes daily during the life of a futures contract?a. Futures priceb. Futures contract sizec. Futures maturity dated. Underlying commodity.
How many stock index futures contracts are required to completely hedge a $250 million stock portfolio, assuming a portfolio beta of .75 and a Mini S&P 500 index futures level of 4,200?
On the maturity date, stock index futures contracts require delivery of:a. Common stock.b. Common stock plus accrued dividends.c. Treasury bills.d. Cash.
How many futures contracts are required to hedge a $250 million bond portfolio with a portfolio duration of 5 years using 10-year U.S. Treasury note futures with a duration of 7.5 years and a futures
A Treasury note futures contract has a quoted price of 100. The underlying bond has a coupon rate of 7 percent and the current market interest rate is 7 percent. Spot-futures parity then implies a
You went long 20 July 2022 crude oil futures contracts at a price of $116.50. Looking back at Figure 14.1, if you closed your position at the settle price on this day, what was your profit?Figure
A stock index futures contract maturing in one year has a currently traded price of $1,000. The cash index has a dividend yield of 2 percent and the interest rate is 5 percent. Spot-futures parity
You are long 10 gold futures contracts, established at an initial settle price of $1,300 per ounce, where each contract represents 100 troy ounces. Your initial margin to establish the position is
A stock index futures contract matures in one year. The cash index currently has a level of $1,000 with a dividend yield of 2 percent. If the interest rate is 5 percent, then spot-futures parity
You shorted 15 June 2022 British pound futures contracts at the high price for the day. Looking back at Figure 14.1, if you closed your position at the settle price on this day, what was your
You manage a $100 million stock portfolio with a beta of .8. Given a contract size of $100,000 for a stock index futures contract, how many contracts are needed to hedge your portfolio? Assume the
You manage a $100 million bond portfolio with a duration of 9 years. You wish to hedge this portfolio against interest rate risk using T-bond futures with a contract size of $100,000 and a duration
Which of the following is not an input needed to calculate the number of stock index futures contracts required to hedge a stock portfolio?a. The value of the stock portfoliob. The beta of the
Review contract characteristics for an option of your choice on Verizon (VZ).
a. Who makes up the OCC? Who regulates the OCC?b. How does the OCC protect option traders?c. What is the OIC, and what does it do?
Stock in Bunyan Brewery is currently priced at $20 per share. A call option with a $20 strike price and 60 days to maturity is quoted at $2. Compare the percentage gains and losses from a $2,000
All of the following statements about the value of a call option at expiration are true, except that the:a. Short position in the same call option can result in a loss if the stock price exceeds the
In Example 15.1, suppose that you bought one call option contract for $200. The strike price is $50. If the stock price is $60 just before the option expires, should you exercise the option? If you
Collect a list of the most actively traded options.
a. If you buy 100 shares of stock at $10 and sell out at $12, what is your percentage return?b. If you buy one call contract with a strike price of $10 for $100 and exercise it when the stock is
A call option sells for $8. It has a strike price of $80 and six months until expiration. If the underlying stock sells for $60 per share, what is the price of a put option with an $80 strike price
Which of the following stock option strategies has the greatest potential for large losses?a. Writing a covered callb. Writing a covered putc. Writing a naked calld. Writing a naked put.
In Example 15.2, if the stock price is $40 just before the option expires, should you exercise the option? If you exercise the option, what is the percentage return on your investment? If you don’t
a. In addition to the underlying asset, what is the major difference between an ordinary stock option and a stock index option?b. In addition to the underlying index, what is the major difference
Which statement does not describe an at-the-money protective put position (comprised of owning the stock and the put)?a. It protects against loss at any stock price below the strike price of the
a. All else equal, would an in-the-money option or an out-of-the-money option have a higher price? Why?b. Does an out-of-the-money option ever have value? Why?c. What is the intrinsic value of a call
Which of the following is not included in the put-call parity condition?a. Price of the underlying stockb. Strike price of the underlying call and put option contractsc. Expiration dates of the
a. What is option writing?b. What are the payoffs and profits from writing call options?c. What are the payoffs and profits from writing put options?d. Explain how a payoff diagram that shows option
According to the put-call parity condition, a risk-free portfolio can be created by buying 100 shares of stock and:a. Writing one call option contract and buying one put option contract.b. Buying
a. What is a protective put strategy, and how does it work?b. What is a credit default swap?c. Explain how a company can use options today to protect itself from higher future input prices.
Investor A uses options for defensive and income reasons. Investor B uses options as an aggressive investment strategy. What is an appropriate use of options for investors A and B,
Suppose a call option exists with 20 days to expiration. It is selling for $1.65. The underlying stock price is $41.15. Calculate the intrinsic value and time value of (1) a call with a strike price

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