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principles of finance

Questions and Answers of Principles Of Finance

(Multi-period binomial model, American and European options) Consider the following two-period binomial model, in which the annual interest rate is 3% and in which the stock price goes up by 15% per
(Multi-period model, American and European) Consider the following twoperiod binomial model: In each period the stock price either goes up by 30%or decreases by 10%. The one-period interest rate is
(Multi-period binomial model, American and European options) Fill in all the cells labeled “???” in the following spreadsheet: Date 0 European put option price ??? ??? ??? ??? ??? ??? ??? ???
(Pricing a complex derivative) A prominent securities firm recently introduced a new financial product. This product, called “The Best of Both Worlds” (BOBOW for short), costs $10. It matures in
(Two-period model, call with changing exercise price) A call option is written on a stock whose current price is $50. The option has maturity of 2 years, and during this time the annual stock price
(Two-period model, put) A stock is currently selling for $60. A put option has maturity of 2 years, and during this time the annual stock price is expected to increase by 30% or to decrease by
(Two-period model with dividends) A call option is written on a stock whose current price is $100. The option has maturity of 2 years, and during this time the annual stock price is expected to
(Two-period model, American put) A 2-year American put option is written on a stock whose current price is $42. You expect that in each year the stock price either goes up by 15% or decreases by 5%.
(Option pricing with sigma) A stock traded for $25 today. The annual standard deviation of the stock returns is 50%. If the interest rate is 3%,a. What is the value today of a 1-year European call
Excel has a function called Sum, which works like Average. Set up the spreadsheet below and use it to add the numbers in cells A1:A3. 1234 A 28 B 15 22
In a new spreadsheet, follow the instructions below: 1234 A 28 B 15 22
In another spreadsheet, show that you can use the function Average to get the same result: 12345 56 A 28 B 15 22
The Excel function Count counts the number of cells containing numbers. Use this function in the spreadsheet below: 1 A 15 B 2345 -11 3 John 4 23
The Excel function CountA counts the number of all the cells in a given range. Experiment with this function in the spreadsheet below: 1 3 John 2345 A 15 -11 23 B
Below are some statistics on the monthly rainfall for Asheville, North Carolina. Fill in the missing data. A B D E 1 G H ASHEVILLE, N.C. MONTHLY PRECIPITATION K M N 2 YEAR JAN FEB MAR APR MAY JUN JUL
Solve the follow sections:a. Complete the following spreadsheet, showing how much will be in your bank account if you deposit an initial deposit (cell B2) today and it draws annual interest given in
The file for this exercise gives 10 years of monthly stock prices for Microsoft(stock symbol: MSFT) and the S&P
Graph the MSFT prices so that the resulting spreadsheet looks like the following: A B STOCK PRICES FOR MICROSOFT (MSFT) AND THE S&P 500 D E F G H K 1 2 Date MSFT S&P 500 3 1-Apr-05 20.36 87.54 4
The monthly return for a stock which has price Pt in month t and price Pt – 1 in month t – 1 is P A 1 2 B STOCK PRICES FOR MICROSOFT (MSFT) AND THE S&P500 Prices C D E F G H I J K L M Returns 3
Transform the MSFT and S&P price data so that the beginning price of each is 100 and graph these series: 1 A B STOCK PRICES FOR MICROSOFT (MSFT) AND THE S&P500 C D E F G H J K L M N P 2 Prices
You want to graph the function y a = − x x + −x 3 2 2 16.The variable a can take on a variety of values (in the example below, a = 0.4). Make a graph of this function with a title that indicates
(NPV) Consider the following set of cash flows:a. Use NPV to compute the present value of the project.b. Suppose the project costs $600. What is its net present value? A 1 Discount rate 2345678 Year
(NPV, IRR, Data Table, graphs) Consider the following set of cash flows:a. Use NPV to compute the net present value for the project.b. Use IRR to compute the internal rate of return of the project.c.
You’re 25 years old, and you want to save for the future. You intend to deposit$1,000 in the bank today. In each of the next 44 years you intend to make a similar deposit. If the interest rate is
Your mom is 50 and wants to put away some money for retirement. She would like to make monthly deposits in the bank, starting today and at the beginning of every month between now and the month
You’ve taken a 30-year, $60,000 mortgage to finance the purchase of your new house. The mortgage has an interest rate of 10% annually and requires monthly flat payments of interest and principal
You are considering buying a bond which pays $112.50 at the end of this and each of the subsequent 10 years. The interest rate is 12%. Use the PV function to value the bond.
You’ve offered to finance Joe’s purchase of a $20,000 car. Joe offers to repay you $500 per month for the next 48 months.a. Use Rate to compute the monthly interest rate he’s offering. Confirm
You are taking a $12,000 loan at 6%. If the maximum annual payment you can make is $2,000, how long will it take you to pay off the loan (hint: use NPER). Build a loan table which confirms your
Your money market fund pays 3% interest annually, compounded continuously.a. If you deposit $100,000 into the fund today and the 3% interest rate holds for the next 10 years, how much will you have
Your bank account pays 5.2% interest annually, compounded continuously.You have $25,000 in the account today, and you intend to withdraw this amount 3 years and 4 months from today. How much will you
Compute the continuously compounded present value of the following set of cash flows, using a discount rate of 15%: A 1 Continuously compounded discount rate 2 Date 1 23 345 3456789 10 67 B 15% Cash
Compute the continuously compounded present value of the following set of cash flows, using a discount rate of 15%. (This problem requires some familiarity with dates in Excel—see Chapter 26.) A 1
You’ve been offered a financial asset which costs $1,000 today and pays back$1,100 in 1 year.a. Compute the discretely compounded rate of return on the asset.b. Compute the continuously compounded
The companion website for this book contains a spreadsheet with IBM stock prices and dividends from February 1990 through August 2004.Part of this spreadsheet is given below; note that column D of
Use SumProduct to compute the return of the portfolio given below. The portfolio is composed of three stocks with weights as indicated. A B Percentage C Stock Stock of portfolio return A 40% 15% B
The end-semester grades for Finance 101 are given below.The professor for the course has to assign each student a letter grad based on his/her average. The professor’s grading key is as follows:Use
On the companion website for the book is a list of companies in the Dow Jones 30 Industrials (DJ30) and their share prices on 27 August 2004. Part of the list is given below.a. What was the average
Using the list of DJ30 companies from the previous exercise:a. Use CountA to determine the number of companies in the list in column A.b. Use Count to determine the number of share prices in the list
The spreadsheet below shows the value of the function f (x x ) = + x − 2 3 16 for x = 3.Create the indicated data table and use it to graph the function in the range (–10, 14). 3 x 4 f(x) 3456789
The example below calculates the NPV and IRR for an investment.a. Create a one-dimensional data table showing the sensitivity of the NPV and IRR to the year 1 cash flow (currently $10,000). Use a
Project A and Project B cash flows are given in the spreadsheet below.Recreate the Data Table in cells A21:C37 and create the graph. Notice that the Data Table headers in cells B21:C21 have been
Finance texts often have tables which give the present value factor for an annuity:PV factor for annuity of for N years at interestr r t tN$1 = = ( + ) ∑ 1 1 1 As illustrated below, in Excel these
(Do this example only if you’ve studied Chapter 17–20 on option pricing.)The Black–Scholes option pricing model, defined in Chapter 19, prices call and put options based on five parameters:•
Consider the present value calculation of a financial asset whose cash flows are given below. Use Goal Seek to find the discount rate such that the present value of the asset’s cash flows is $800.
A financial asset costs $500 and produces cash flows in years 1, 2, . . ., 5.The year 1 cash flow is $100 and subsequent cash flows grow at a rate of 5%. As you can see below, the asset’s internal
(This problem requires some knowledge of portfolio calculations covered in Chapter 8.) Below you will find data on the returns, E r( ) A and E r( ) B , and standard deviations, σA and σB, of stocks
Graphing and Goal Seek:a. Graph the function y x = −2 2 − +x 14 2 for x = –4.0, –3.75, –3.50, . . ., 3.0. What are the approximate values of x for which y = 0?b. Using Goal Seek on the
(Adjusting prices to reverse split) A reverse split is just like a split, only in a reverse direction. For example, in a 1-for-2 reverse split, you receive one share for every two shares you hold.
(Correlation coefficient calculation) You believe that there is a 15% chance that stock A will decline by 10% and an 85% chance that it will increase by 15%. Correspondingly, there is a 30% chance
(Finding dominating portfolio) Consider the data for Stock A and Stock B below.A portfolio composed of 90% of Stock A and 10% Stock B has an expected return of 7.6% and a standard deviation of
(PV single cash flow) Your friend comes to you with a $2,000 post-dated check. The check is due 2 years from today. If the interest rate is 5%, what is the value of the check today?
(Descriptive statistics of two stocks) Here is the stock price history of “HighTech” and “LowTech” corporations.Calculate:a. The annual returns for each stock.b. The mean (average) 10-year
(Descriptive statistics) Below you will find price data for three mutual funds:a. Compute the annual returns on the funds for the period.b. Compute the mean, variance, and standard deviation of the
(Descriptive statistics) Here is the monthly stock price data for Ford and GM:a. Calculate the monthly returns for each firm.b. Calculate the covariance between returns of Ford and GM. A 1 B C PRICES
(Adjusting prices to dividends) Here are stock price and dividend data for Kellogg Co.:a. Calculate the dividend-adjusted returns for each of the years, their mean, and their standard deviation.b.
(Regression of two stocks) Use the returns of Ford and GM corporations in the previous question. Regress Ford’s returns on those of GM. Report:a. The slope of the regression.b. The value of the
(Adjusting prices to dividends and splits) Below you will find weekly stock price, dividend, and split data for Visa:a. Calculate the dividend and split-adjusted returns for each of the weeks.b.
(Statistics and diversification of two stocks) Below please find the adjusted prices of Kellogg (K) and IBM:a. Compute the annual return of each stock.b. Compute the covariance and correlation
(Adjusting prices to splits) Here are the stock price and split data for HeavySteel corporation.a. Calculate the split-adjusted returns for each year and its statistics (mean and standard
(Dividend adjusted returns) Young Corporation grows very rapidly, does not pay any dividends, and retains all its profits. Mature Corporation stopped growing a long time ago, generates sizable cash
(Correlation coefficient of two negatively linearly correlated stocks)Chicken Feed and Poultry Delight are two stocks traded on the Farmers Stock Exchange. A statistician has determined that the
(Portfolio of two stocks) Below you will find the annual returns of two assets.Fill in the blanks, and graph the returns of the portfolios (rows 13–28). A B C 1 Asset 1 Asset 2 2 31-Dec-2006 12.56%
(Descriptive statistics and portfolio of three stocks) Here are data on the stock prices and returns of General Electric (GE), Boeing (BA), and Walmart (WMT).
(Downloading data and descriptive statistics of stocks) Go to http://finance.yahoo.com. Download monthly stock price data for Oracle Corporation(ORCL), Microsoft Corporation (MSFT), and IBM
(Regression of a stock against the market) By using information provided in the previous problem, perform a regression of the portfolio returns vs. S&P 500 index returns for the period of 24 months.
(General) Explain why each of the following statements is correct or incorrect:a. Diversification reduces risk because prices of stocks do not usually move exactly together.b. The expected return on
(Expected return and probability distribution) Assume that an individual can either invest all of her resources in one of two securities A or B; alternatively, she can diversify her investment
(Portfolio with negative perfect correlation) Suppose that the annual returns on two stocks (A and B) are perfectly negatively correlated and that rA = 0.02, rB = 0.06, σA = 0.1, and σB = 0.15.
(Portfolio of three stocks) The correlations between the returns of three stocks A, B, and C are given in the following table:The expected rates of return on A, B, and C are 16%, 12%, and 15%,
(Regression analysis) Outdoorsy people know that crickets chirp faster when the temperature is warmer. Some evidence for this can be found in a book published in 1948 by Harvard physics professor
(Regression analysis) Economists have long believed that the greater the amount of money printed, the higher the long-term interest rates. Evidence for this view can be found in the table below,
(Regression analysis) Mabelberry Fruit and Sawyer’s Jam are two competing companies. An MBA student has done a calculation and found that the return on Sawyer’s Jam stock is completely
The template for this exercise gives price information for four oil companies.a. Compute the stock returns and the individual regressions of returns on the S&P 500.b. For an equally weighted
The template for this exercise gives price information and market cap for 10 companies. Compute the stock returns and the individual regressions of returns on the S&P 500.Use this data to construct a
In the template for this exercises, you will find the data for 10 packaged food stocks. Run the template data, and find the portfolio statistics. Notice that while the portfolio R2 is higher than the
Make up your own portfolio! Repeat exercise 2, but substitute a 10-asset portfolio of your own creation. Here are some suggestions:• Portfolio of “green” (environmental-friendly) stocks.•
(Statistics for stocks and portfolio) The table below presents the year-end prices for the shares of Ford and PPG from 2002 to 2014:a. Calculate the following statistics for these two shares: average
(Basic stock statistics) You invest $500 in a stock for which the return is determined by a coin flip. If the coin comes up heads, the stock returns 10%, and if it comes up tails, the investment
(Basic two-stock statistics) You have $500 to invest. You decide to split it into two parts. The return on each $250 will be determined by a coin toss, and the results of the two tosses are not
(Basic two-stock statistics with non-zero correlation) The previous question assumes that the correlation between the coin flips is zero. Repeat this question with the following correlations:a. If
(Portfolio statistics of two stocks) Calculate the average return and the variance of a portfolio composed of 30% of GM and 70% of Microsoft (MSFT)stocks, using the following data: 1. A B A PORTFOLIO
(Finding the dominating portfolio and the minimum variance portfolio)Consider the following statistics for a portfolio composed of shares of Companies A and B:a. Suggest a portfolio combination that
(Statistics of two stocks, regression) Consider the returns for Ford and MSFT stocks given below:a. Calculate the mean return and the standard deviation of each stock.Also calculate the correlation
(Portfolio of two stocks) The following spreadsheet presents data for stocks A and B.a. What are the return and the standard deviation of a portfolio composed of 30% of stock A and 70% of stock B?b.
(Minimum variance portfolio) Suppose that the return statistics for stocks A and B are given below. What is the standard deviation of the minimum variance portfolio? A B C Stock B 15% 0.0484 1 2 3
(Portfolio statistics, efficient frontier, and minimum variance portfolio) ABC and XYZ are two stocks with the following return statistics:a. Compute the expected return and standard deviation of a
(Constructing a portfolio to match target return) Melissa Jones wants to invest in a portfolio composed of stocks ABC and XYZ (see below) that will yield a return of 19%. What is the weight of each
(Stock characteristics to match portfolio target return, challenging) Your client asks you to create a two-stock portfolio having an expected return of 15%and standard deviation of 25%. The client
(Efficient frontier) This question relates to the data in the previous question.Calculate and graph the efficient frontier of the stock portfolios composed of stocks X and Y.
(Minimum variance portfolio) What will be the weights, the expected return, the variance, and the standard deviation of the minimum variance portfolio combining the stocks below? A B C 234567 X Y 3
(Efficient frontier) This question relates to the data in the previous question.Calculate and graph the efficient frontier of the stock portfolios composed of stocks X and Y. A B C 1 RETURN
(Stock vs. portfolio basic statistics) John and Mary are considering investing in a combination of ABC stock and XYZ stock. The return on ABC is determined by a coin flip: If the coin is heads, the
(Minimum variance portfolio and efficient portfolio to match target return)During the decade 2005–2014, Ford and Microsoft (MSFT) were negatively correlated (see data below). Find the following two
(NPV and IRR) You are offered the following project:a. What is the NPV of the project at a discount rate r = 6%?b. Do you want to invest in the project at r = 6%?c. Would you change your mind if r =
(NPV and IRR) You are considering a project whose cash flows are given below:a. Calculate the present value of the future cash flows of the project.b. Calculate the project’s net present value.c.
(NPV or IRR) You are considering buying an asset that has a 3-year life and costs $15,000. As an alternative to buying the asset, you can lease it for four payments of $4,000. The first payment is
(NPV or IRR) You are considering buying an asset that has a 3-year life and costs $2,000. As an alternative to buying the asset, you can lease it for $600 per year; the first payment is due today and
(NPV and IRR) You work in a company that sells furniture. The company is considering a new marketing campaign. The marketing campaign cost is$1M to be paid immediately. You expect that as a result of
(NPV and IRR) You are offered the following three projects:Assume that the cost of capital (interest rate) is 12%.a. Find the NPV of each project?b. If you can choose only one project, which one

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