Question 1 )

a) Which of the following statements is correct?

A.To estimate the equity value, we can discount all cash flows to equity using the cost of capital.

B.Net cash flows are defined as cash flows after taxes, expenses, and interest payments to debtholders.

C.The current intrinsic value for a stock is simply the present value of all expected future dividend payments.

D.Firms with high P/E ratios usually have low ROEs.

b)If options are priced correctly, the premium of a call should be lower when its strike price is ___, and the premium of a put should be higher when the strike price is ___.

A.Lower, lower

B.Lower, higher

C.Higher, lower

D.Higher , higher

c)You are creating an option strategy by using calls and puts that have the same strike price. Which of the following strategies will make a profit if the stock price decreases but will have a loss if the stock price increases?

A.Sell a call and buy a put

B.Buy a call and sell a put

C.Buy a call and buy a put

D.Sell a call and sell a put