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Date Posted: 12:58:15 11/03/00 Fri
Author: Charles Hodges
Subject: Re: Take Home Quiz Answers for Dr Hodges to correct
In reply to: James Garrison 's message, "Take Home Quiz Answers for Dr Hodges to correct" on 22:16:49 10/29/00 Sun

Unless otherwise noted, the below answers are correct.

> 1.f
> 2. Hard rationing no circumstances in which
> constraints violated. Soft under some circumstances
> constraints can be violated.
> 3. Opportunity costs impossible to measure, hind sight
> better than for sight, Measuring incremental cash
> flows from decisions are very dificult.
> 4. Abandonment Option, Postponement Option, Price
> Setting Option, Future Investment Opportunities Option
> 5.Future Investment Opportunities Option ussually out
> weighs Abandonment Option

Mainly, the principle of two sided transactions. If it is worthless to you, it is worthless to someone else. The exception is that if you are a bad manager, then clearly the subsidiary is worth more to someone else. However, rarely is admitting to being incompetent a way to increase your stock price.

> 6.call, you, current employer, higher wage
> 7.put, owner, potiential buyers of stock or company,
> share price
usually this is a call, where the exercise price is the face value of debt. If the company is worth more than the debt, the owner pays the bondholders, if worth less the equity owner defaults on the debt and gives the company to the bondholders.
Thus call, equity owner, bond owners, present value of firm's assets.

> 8. call, you, protintial employer, salary
> 9.put, product producer, world, product revenue
> 10. call, new owners, management, slary of management
> or paachute value
> 11.call, you, world, increased profit from using
> efficient machines
9,10, and 11 were covered in class.

> 12. B
The best answers are B or C. The combination 1,5,9 (not shown) is best since cost of financing does not impact the calculated IRR. Shorter paybacks are associated with higher IRR. MACRS has the effect of shortening the payback.

> 13. True
> 14. ABDE
> 15. Ingoring premium paid let option expire and lose $0
> 16. Ignoring premium recieved option will be exercised
> against you. Lose $300
> 17. time 0
> sell stock for $80 and put for $14
> Buy call for $6 and invest $88 at 5%
> time 1
> collect $88 @5% or $92.40
> profit $2.40 at time 1

This is tricky, as you needed to take the PV of the Exercise price, 90/1.05= $85.71.
Thus, put-call parity is 80 + 14 > 6 + 85.71. To buy low and sell high, we sell the stock and the put then buy the call and loan $85.71, leaving an artitrage profit of $2.29.

> 18. call price $8.29
> 19. call value $6,630,000
On this one, we needed an exercise price. At exercise price equal to selling price, the above is correct.

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