Questions 11-13 are based on the following information.

ABC Co. is a growth company, whose stock is currently traded in Nasdaq. The book value-based accounting balance sheet at the year-end is as follows.

Assets (in millions)			Liabilities & Equity (in millions)
Current Assets			Current Liabilities
Cash and equivalents	15		Accounts payable	75
Accounts receivable (net)	40		Notes payable	3
Inventory	45		Other current liabilities	10
Other current assets	12
Long-Term Assets			Long-Term Liabilities
PP&E (net)	15		Long-term debt	15
Other long-term assets	14		Capital leases	20
			Shareholders Equity	18
Total Assets	141		Total Liabilities & Equity	141

There are 2 million shares outstanding. Each share is currently traded at $45. Due to the short term nature of current assets and current liabilities, their market values are about the same as their book values. For long-term assets such as PP&E, it is difficult to determine their market value because their secondary markets, if existing at all, are very thin. So, it is not unreasonable to assume that the book values of long-term assets are equal to their market values. For long-term liabilities, their market values are about the same as their book values if the market interest rate and the credit quality of the borrowing firm do not change much over time. Assume that the market interest rate is stable and ABCs credit risk does not change. Suppose the stock market is efficient.

Flag question: Question 11

Question 11 2.5 pts

The market value of ABCs equity is ____.

Group of answer choices

$18 million

$72 million

$90 million

$141 million

Flag question: Question 12

Question 12 2.5 pts

Now, we want to convert the above accounting balance sheet to a market value-based economic balance sheet. In this economic balance sheet, the value of the growth assets (or growth potential) is equal to ____.

Group of answer choices

$18 million

$72 million

$90 million

$141 million

Flag question: Question 13

Question 13 2.5 pts

The book value per share for ABC is $9 (= 18 million / 2 million). So ABCs price to book value per share ratio (P/B) is 5 (= $45 / $9). In other word, the market value of ABCs stock is five times as large as the book value of the stock. All of the followings help to explain the big gap between market value and book value of equity EXCEPT _____.

Group of answer choices

The market value of equity accounts for ABCs growth potential but the book value ignores the growth potential.

The market value of equity accounts for ABCs intangible assets but the book value ignores most, if not all, intangible assets.

The market value of equity is forward-looking, whereas the book value of equity is backward-looking.

In an efficient stock market, the market value of a stock should be equal to the book value of the stock. So, there is currently a mispricing in ABCs stock.

Questions 21-25 are based on the following information.

Before its IPO on 12/03/1998, Ubid was a fully-owned subsidiary of Creative Computer, which had 10,238,703 shares outstanding. In the IPO, 1,817,000 shares out of the total 9,146,883 outstanding shares of Ubid were sold to public investors. The remaining Ubid shares were expected to be distributed to the shareholders of Creative Computer after six month. On 12/09/1998, Creative Computers stock price was $22.75 and Ubids stock price was $35.6875.

Flag question: Question 21

Question 21 2.5 pts

Because Creative Computers were undervalued relative to Ubid on 12/09/1998, Elena King wanted to buy Creative Computers and short Ubid on this date to exploit the relative mispricing and hedge the Ubid stock price risk. What should be sell-to-buy share ratio? In other words, for each share of Creative Computers that Elena bought, she needed to sell how many shares of Ubid?

Group of answer choices

1

0.8934

0.8

0.7159

Flag question: Question 22

Question 22 2.5 pts

On 12/09/1998, Elena King established a long-short arbitrage position using the sell-to-buy ratio determined in the previous question. Suppose she only needed to minimally satisfy Reg T (i.e., 50% on margin loans and 50% margins on short selling) in the Creative Computer/Ubid long-short arbitrage. Elenas equity amount in this long-short arbitrage on 12/09/1998 would be _____.

Group of answer choices

$12.78

$17.84

$24.15

$29.21

Flag question: Question 23

Question 23 2.5 pts

Suppose Elena established an arbitrage position on 12/09/1998. On 12/17/1998, Ubids stock close price increased from the previous $35.6875 to $42.5625 and Creative Computers stock close price increased from the previous $22.75 to $23.00. Suppose the cash posted as collateral for the short sale, the margin loan and the short proceeds were all determined on the initial trading date (12/09/1998) and did not change. However, the value of the long position, the value of the short position, and Elenas equity value in the long-short strategy adjusted to the new market prices. Ignoring the interest paid on short proceeds, collaterals, and margin loans, the Elenas equity amount in this long-short arbitrage on 12/17/1998 would be _____.

Group of answer choices

$19.48

$22.59

$30.47

$61.33

Flag question: Question 24

Question 24 2.5 pts

Elenas 8-day investment return between 12/09/1998 and 12/17/1998 would be _____.

Group of answer choices

19.27%

0.41%

19.34%

22.66%

Flag question: Question 25

Question 25 2.5 pts

Assuming that 25% of the long position and 30% of the short position is required for the minimum maintenance margin. Would Elena receive a margin call from her prime broker on 12/17/1998?

Group of answer choices

Yes, because Elena needed to have a minimum of $14.89 equity capital on 12/17/1998 to avoid a margin call.

Yes, because Elena needed to have a minimum of $53.47 equity capital on 12/17/1998 to avoid a margin call.

No, because Elena needed to have a minimum of $14.89 equity capital on 12/17/1998 to avoid a margin call.

No, because Elena needed to have a minimum of $53.47 equity capital on 12/17/1998 to avoid a margin call