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Date Posted: 07:18:41 11/11/00 Sat
Author: Charles Hodges
Subject: Re: Sample Test Answers, Could you check and correct?
In reply to: Sean Wilson 's message, "Sample Test Answers, Could you check and correct?" on 10:35:40 11/08/00 Wed

I have inserted comments where 1) the topic of the question would not be on your exam, or 2) where I would suggest a different answer.

> MC1. F
> TF1. False, acquired
> 2. False
> 3. True, don't worry about financing
correct. While we can't always do this, we do try.

> 4. True
False, the high P/E firm's P/e falls and their EPS increases. This question would not be on the exam as it is a WACC question.

> 5. True
correct. This question would not be on the exam as it is a WACC question.

> 6. False
correct. This question would not be on the exam as it is a WACC question.

> 7. False, put
correct, but a different explanation... The firm owns the call, the bond owner is short the call.

> 8. False, tangibles are more likely to be abandoned
> 9. False, stars come first
correct, we must consider real options in making capital budgeting decisions in fast growing market.


> 10. False
Incorrect, the answer is true. This question would not be on the exam as it is a WACC question.

>
> 1. ABDE
> 2. WACC problem??
This question would not be on the exam as it is a WACC question.

> 3. Lose 300
incorrect, as you are long you have the option to act. Thus you do nothing, option expires worthless thus profit = 0.

> 4. win, get to keep the premium
incorrect. as you are short, you have an obligation and thus have no strategy. the put owner will exercise the option and you will lose $300.

> SA2. they would only abandon if the abandonment value
> is greater than the PV of CFs w/o abandoning.
yes, also see my posting in a different message on this question.

> SA3
> a. the owner will issue the stock if he feels it will
> increase in value. Put, owner, potential buyers,
> share price
>
> b. the person will take job offer if it benefits him.
> call, person, current employee, money from new job
>
> c. test marketing delays the introduction of a
> product. Put, product producer, world, product
> revenue.
>
> d. senior management will be fired if there is a
> takeover. put, new owners, management, salary of
> management
>
> e. the efficient machine has more chance of increasing
> revenues. call, you, world, increased profits from
> using efficient machine.
>
> f. you can drop without penalty at a certain date.
> call, you, someone else wanting to get in the class,
> sits in the classroom
>
> g. if you do badly on one test it won't hurt you.
> call, you, people who don't make a low test grade,
> grade
>
> h. staying with girlfriend will only cause problems.
> put, girlfriend, george, medical bills.
>
> i. he'll get money if she dies. call, george,
> insurance company, 5,000,000 policy.
>
> j. you can buy if you'd like. call, me, world,
> expected revenues
>
> MC2. C
incorrect, D. Go back to your Black Sholes model and see how changes in the various inputs affects call option value.

> MC3. B
see my discussion in another message. Note, I am likely to have a variation on this question on your next exam.

> MC4. D
incorrect the second E. PI reinvests at cost of capital and IRR reinvests at IRR.

> MC5. either C or E
incorrect, E only. Crown Jewel defense is where you sell off the most valuable assets in order to make your company less attractive.

> 5. Buy Stock -80 Sell Stock 90
> Buy Put -14 Collect B 89.47
> Sell Call +4 Arbitrage +.53
> Sell Bond 88
this looks correct. We need to use put-call parity.
S+P=C+Xert ==> 80 + 14 < 6 + 90/((1.05)**.333)
If we buy low and sell high, we buy the stock and put and sell the call and sell a bond to finance the transaction.
I did not replicate the calculations to verify the answer.
>



> 6. 7,698,113.21
> 7. -or -ee both
> EPS 2 6 .849
> Price 20 180 20
> P/E 10 30 23.55
> # shares 10m 7m 73m
> TE 20m 42m 62m
> TV 200m 1260m 1460m
This question would not be on the exam as it is a WACC question.

>
> 8. WACC???
This question would not be on the exam as it is a WACC question.

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Replies:

  • Sample Test Answers, Could you check and correct? -- Manuel Aguirre M, 09:05:47 01/23/06 Mon
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