Fight Finance

(a) $57.1734

(b) $28.0394

(c) $27.7723

(d) $27.5000

(e) $27.2330

(a) The before-tax cost of debt is less than the before-tax cost of equity. Therefore debt is a cheaper form of financing than equity so companies should try to finance their projects with debt only.

(b) Debt makes a firm's equity more risky. Therefore the higher the amount of debt, the higher the cost of equity.

(c) The more debt a firm has, the higher its tax shields. Therefore firms should seek to have as much debt and as little equity as possible.

(d) The more debt, the lower the firm's after tax WACC. The after tax WACC is the discount rate that discounts the firm's cash flows, so the lower it is the more the firm is worth. Therefore firms should try to make their after tax WACC as low as possible by using as much debt as possible.

(e) The less debt, the lower the chance of bankruptcy. Therefore firms should try to pay off all of their debt so that they are financed by equity only.

(a) Project value with the option less project value without the option.

(b) No-arbitrage binomial option pricing model.

(c) Risk-neutral binomial option pricing model.

(d) Gordon growth model.

(e) Black-Sholes option pricing model.

(a) ##\pi_{SC}=max⁡(S_T-X_T,0) + f_{LC,0}##

(b) ##\pi_{SC}=-max⁡(S_T-X_T,0) + f_{LC,0}##

(c) ##\pi_{SC}=max⁡(X_T-S_T,0) + f_{LC,0}##

(d) ##\pi_{SC}=-max⁡(S_T-X_T,0) - f_{LC,0}##

(e) ##\pi_{SC}=-max(X_T-S_T,0) - f_{LC,0}##

(a) Mr Blue's expected utility of wealth from gambling is 7.5 while refusing is 8.54. So the gamble makes him less happy.

(b) Miss Red's expected utility of wealth from gambling is 5 and refusing is also 5. So the gamble doesn't affect her happiness at all.

(c) Mr Blue's certainty equivalent of the risky gamble is $25. This is less than his current wealth which is why he would refuse.

(d) Miss Red's certainty equivalent of the risky gamble is any wealth. She's indifferent since she always has the same level of happiness.

(e) Mrs Green's certainty equivalent of the risky gamble is $25. This is less than her current wealth which is why she would refuse.

(a) 12.682503% pa

(b) 12.060201% pa

(c) 12% pa

(d) 11.940397% pa

(e) 3.464102% pa

(a) Expected total return will equal its required total return if the stock is fairly priced.

(b) Expected total return will be less than its required total return if the stock is over-priced.

(c) Required total return should be higher than the risk free government bond yield if the stock has a positive beta.

(d) Required total return depends on its total variance, required capital return depends on systematic variance and the dividend yield depends on idiosyncratic variance.

(e) Expected capital return equals the expected total return less whatever the management decide that they will pay as an income return (which is the dividend yield).

(a) Has a beta of 0.5.

(b) Is fairly priced.

(c) Has systematic standard deviation equal to 10% pa.

(d) Has diversifiable standard deviation equal to 20% pa.

(e) Has total standard deviation equal to 40% pa.

(a) immediately after the option purchase date.

(b) After the option matures but only if it is exercised.

(c) After the option matures but only if it lapses and is not exercised.

(d) After the option matures, regardless of whether it is exercised or not.

(e) The option price is never a sunk cost.

(a) Depreciate against the USD to be, say, 99 JPY per USD.

(b) Depreciate against the USD to be, say, 101 JPY per USD.

(c) Appreciate against the USD to be, say, 99 JPY per USD.

(d) Appreciate against the USD to be, say, 101 JPY per USD.

(e) Remain at 100 JPY per USD.