Maximum Word Count 3500 words

1. Options Show all the workings for the calculation. Given the following variables, calculate the price of a six-month call option on the stock. The stock price is $220, the exercise price is $190, the volatility is 30% and the risk-free rate of interest is 5%. The tax rate is 30% and the company cost of capital is 12%. (8 marks)

2. Agency There have been a number of technology IPOs in recent years in the USA. Most of these have a dual class feature, where the owners of the company have a special class of shares that have super voting rights. During the late 2010s, borrowing rates for companies fell dramatically and even poorly rated companies could issue bonds (Junk Bonds) with very low coupons and because of the availability of credit the covenants were very light. Discuss the agency issues arising from the two descriptions above. (8 marks)

3. Share buybacks Share buybacks were illegal in the US up until 1982 and it was 1998 when the last restrictions on share buybacks were removed in Germany. Why do you think buybacks were illegal and explain whether you think they should be made illegal again? Discuss how a buyback affects a company and a shareholder compared to the payment of a dividend. (8 marks)

4. Calculations Show all the workings for the calculations. (i) The following interest rates exist in the markets for years 1 to 5 respectively: 2%, 2.5%, 3.25%, 4.25% and 5.5%. Calculate the one-year forward starting in year 2 and the two-year forward starting in year 3. (ii) The exchange rate between Freedonia and Barama is 22.5 Freeds to 1 Bar. If the one-year interest rates in the two countries are 7% and 11% respectively, what is the six-month forward rate between the two countries? The corporate tax rate in Freedonia is 35% and is 25% in Barama. (8 marks) 5

5. Valuation On the 1st May 2020, Amazon shares traded on a priceearnings multiple of 109.20 and on the same day General Motors traded on a P/E of 4.57. The P/E for the S&P 500 (the main US stock index) was 20.3 on the same day. Explain to person in the street why the figures are so different and give a justification for these values. Choose one major weakness of the P/E ratio and discuss it. (8 marks)