# Fight Finance

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A firm is considering a new project of similar risk to the current risk of the firm. This project will expand its existing business. The cash flows of the project have been calculated assuming that there is no interest expense. In other words, the cash flows assume that the project is all-equity financed.

In fact the firm has a target debt-to-equity ratio of 1, so the project will be financed with 50% debt and 50% equity. To find the levered value of the firm's assets, what discount rate should be applied to the project's unlevered cash flows? Assume a classical tax system.

You operate a cattle farm that supplies hamburger meat to the big fast food chains. You buy a lot of grain to feed your cattle, and you sell the fully grown cattle on the livestock market.

You're afraid of adverse movements in grain and livestock prices. What options should you buy to hedge your exposures in the grain and cattle livestock markets?

Select the most correct response:

A wholesale shop offers credit to its customers. The customers are given 21 days to pay for their goods. But if they pay straight away (now) they get a 1% discount.

What is the effective interest rate given to customers who pay in 21 days? All rates given below are effective annual rates. Assume 365 days in a year.

Question 432  option, option intrinsic value, no explanation

An American call option with a strike price of $K$ dollars will mature in $T$ years. The underlying asset has a price of $S$ dollars.

What is an expression for the current intrinsic value in dollars from owning (being long) the American call option? Note that the intrinsic value of an option does not subtract the premium paid to buy the option.

Which firms tend to have low forward-looking price-earnings (PE) ratios? Only consider firms with positive PE ratios.

A company conducts a 10 for 3 stock split. What is the percentage increase in the stock price and the number of shares outstanding? The answers are given in the same order.

A stock has an arithmetic average continuously compounded return (AALGDR) of 10% pa, a standard deviation of continuously compounded returns (SDLGDR) of 80% pa and current stock price of \$1. Assume that stock prices are log-normally distributed.

In 5 years, what do you expect the mean and median prices to be? The answer options are given in the same order.

Which of the following assets would you expect to have the highest required rate of return? All values are current market values.

If future required returns rise, and future expected cash flows remain the same, then prices will , or remain the ?

A 2-for-1 stock split is equivalent to a 1-for-1 bonus issue or a 100% stock dividend. or ?