True, false or uncertain? Please explain your answers carefully and fully. No points will be rewarded for a true/false-only answer.

1. (5 points, Ch2Q1a) The duration of a bond maturing at date T is always less than the duration of a zero-coupon bond maturing on the same date.

2. (5 points, Ch3Q2) The market price of a share of stock equals the discounted value of the stream of future earnings per share.

3. (5 points) Growth stocks must have a plowback ratio > 1.

4. (5 points) If a commercial airline wants to hedge its risk against oil prices, it should go short in oil futures.

5.(5 points) The value of an American call option is always equal to the value of a European call option.

6. (5 points) Holding everything else constant, the price of a European call option is increasing with increasing risk free interest rate

7.. (5 points) Investors do not get rewarded for bearing idiosyncratic risk.

8. (5 points, CH7Q7) CAPM implies that all risky assets must have a positive risk premium.

9. The annual membership fee at your health club is $750 per year and is expected to increase at 5% per year. A life membership is $7,500 and the discount rate is 12%. In order to justify taking the life membership, what would your minimum life expectancy need to be?

10. Limited liability is a characteristic of what form of business ownership?

11.An important purpose of full-disclosure laws and regulations is to

12.What effect do some environmental laws have on businesses?

13.Detail one set of assumptions that imply that the CAPM holds and show how the CAPM result follows from these assumptions.

14.Show the Black-Scholes formula for the price of a call option on a non-dividend paying stock. Explain what each symbol in the formula means and how the variable that it represents affects the option price.

15.'Explain how the formula can be modified to give the value of an option on a stock paying a continuous dividend

16.Give some examples of how option pricing can be applied in corporate finance.

17.Explain the difference between a forward contract and a futures contract.

18.Use the Rational Expectations approach to derive an expression for the futures price of a cash flow with payoff xt+T at time t + T .

Company Ts current return on equity (ROE) is 16%. It pays out one-quarter of earnings as cash dividends (payout ratio = .25). Current book value per share is $35. The company has 5 million shares outstanding. Assume that ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 10% and the company increases the payout ratio to 60%. The company does not plan to issue or retire shares. The cost of capital is 9.5%. a. (10 points) What is stock T worth?