FIN 431 Final

You bought a call option with a $35 strike price for $.25 when the underlying stock was selling for just $34. Just prior to expiration, the stock was selling for just $34.50. What was your gain or loss?

$0.25 loss

The enterprise value of Oxford Inc is closest to:

$12.14 million

Ole Miss is a startup company and is not expected to pay any dividends for 4 years. Beginning year 5, earnings are expected to stabilize and grow at a sustainable rate for 6% indefinitely and the firm is expected to payout 40% of its earnings in dividends.

$15.55

What is the value of a six month European call option with a strike price of $150 and the current price of the underlying asset is $160. The risk free rate is 5% and the standard deviation is 30% per annum.

$20.80

Assume that the present value of the unlevered free cash flows for a company is $500 million. The present value of the terminal value is $3000 million. Net debt is $200 million. The cost of equity is 11% and the WACC is 9%. There are 100 million diluted shares outstanding. What is the equity value per share?

$33.00

Suppose that the current stock price is $52, and the risk free rate is 5%. You have found a quote for a three moth put option with an exercise price of $50. The put price is $1.5. What is the price of the three month call option?

$4.12

An investor buys a call with a strike price of $40 and sells a call on the same stock...

-$5.00

What is the covariance between stock A (r=8.76%)...

0

What is the variance of a risk free asset?

0

Using the same logic of the exit multiple method, calculate the terminal value range for a firm, given a terminal year EBITDA of $200 million, debt of $300 million, and a comparable company's range of 6x too 7x.

1.2B to 1.4B

The company's cost of equity is closest to:

10.88%

Oxford Inc. has a net profit of 12%, a total asset turnover of 1.2 times, and a financial leverage multiplier of 1.2 times. Oxford's ROE is:

17.3%

A firm is worth $1 million and is financed with 30% risk free debt and 70% equity, grows in value to $1.5 million. What is its new debt/equity ratio?

25%

An analyst has gathered the following data about Ole Miss Inc's publicly traded shares: Beta of 1.375; annual return of 10.5%; market rate of return 6%; risk free rate is 2%. Compute the stock's abnormal return.

3%

An executive is given two choices, either receive nontransferable one year European call options on 1000 shares with an exercise price of 100 or get an extra 1000 in bonus at the end of the year for every point that the company's stock exceeds 100 dollars. Which bonus plan should she choose to provide her with the largest dollar payout?

???? Take the options, since optionality has value. ????

Which of the following companies has the lowest creditworthiness?

A company with a high number of days receivables.

Which of the following statements is most accurate?

A price to book ratio that is higher than the industry average suggests that investors believe that the company has more significant future growth opportunities than its industry peers

If you use a real options argument to value an asset that you have already valued using a DCF valuation model, which of the following will you expect to see as your real option value?

A value greater than the DCF vaue

If the pro forma EPS of two combined companies is higher than the EPS of the acquirer on a standalone basis, the transaction is said to be:

Accretive

Financial ratios that indicate the efficiency of a firm in utilizing its various assets are commonly known as:

Activity Ratios

Why do you think corporations hold cash?

All of the above

A certain analyst boasts that she earned 30% on her stock picks while the S&P 500 returned only 15%...

All of the above are possible reasons for her extraordinary year.

Which of the following statements regarding a firm's ROE is least accurate?

An increase in ROE is always a positive sign for the firm

Your boss asked you to put together a due diligence list to help determine whether or not the company she will be visiting is a good LBO candidate...

Are the company's cash flows stable

In preforming a comprehensive valuation of a given target, where would precedent transactions values be expected to be?

At the high end of the range

We discussed in class that you only get rewarded for taking on systematic risk. Which risks below do you think will affect the risk premium that investors will demand?

Both A and D. The risk that oil prices rise, increasing production costs. The risk that the economy slows, reducing demand for the firm's products.`

Which of the following statements is true?

By diversification, you can have the same expected return with less risk exposure.

Which of the following comparisons of the CAPM and the APT are true?

CAPM bases the expected return on an asset on one factor-the market portfolio; APT bases the expected return on a number of economic factors.

Following are the most reliable factors that can explain a firm's leverage except:

CEO of the firm

A portfolio manager adds new stock to a portfolio that has the same standard deviation of returns as the existing portfolio but has a correlation coefficient with the existing portfolio that is less than +1. If the new stock is added, the portfolio's standard deviation will:

Decrease

Which business profile characteristic is least likely to be considered in comparable company analysis?

Discontinued operations

Which of the following is not a reason that strategic acquirers can pay a higher price than financial sponsors?

Fewer antitrust concerns and costs

Recall the HBS case, titled "The Allergan Board Under Fire,"...Following are the reasons why hedge funds are important for the financial markets except

Hedge fund activists are short-termists.

Rebel Gold is a gold mining company with substantial undeveloped reserves of gold and relatively little gold production. Which of the following combinations will make its gold reserves more valuable?

High gold prices with high volatility in those prices.

Which of the following is a FALSE statement?

Interest payments are tax-deductible but dividends are not

Following are the assumptions of CAPM expect:

Investors are not rational mean-variance optimizers like in the Markowitz world

Which of the following statements is FALSE?

It is possible there is no discount rate that will set the NPV equal to zero

What would be the impact on valuation if you switched from a 5% to an 8% market risk premium?

Lower

Fama and French have come up with a five factor asset pricing model as discussed in class and also in the last HBS case. The following are one of the five factors according to this model except:

MOM

The following are the internal mechanisms for corporate governance in a firm, expect

Market for Corporate Control

Which of the following is not typically a primary goal of a leveraged buyout?

Minimize the amount of debt carried by the target

Real Option Value is equal to:

NPV with option - NPV without option

Some argue that a merger between companies in unrelated industries creates value because it diversifies risk. Is this correct?

No because such diversification only reduces unsystematic risk.

Which of the following predicts the existence of an optimums capital structure for an individual firm that is financed with both debt and equity?

None of the above

In M&As, all of the following are advantages of a negotiated sale except:

Potential to "leave money on the table"

Which of the following generally provides the highest valuation on a football field graphic display?

Precedent value transactions

Which of the following is a good multiple?

Price/Earnings

Empirically, which corporate governance mechanism has been found to be the weakest in tackling agency problems?

Product Market Competition

Which of the following statements is incorrect?

Put option sellers have the option to buy the asset from the holder of a put option, for the given exercise price, should the option holder choose to exercise the option.

Fama and French came up with a three factor asset pricing model as discussed class. The following are the three factors according to this model:

SMB, HML, and the Market factor

If there are two risky portfolios that have a correlation of -1 with positive investment weights , what would the expected rate of return on this portfolio be if you want it to be fully diversified?

Same return as that on the risk free rate

Which of the following statements about the SML and CML is FALSE?

Securities that fall on the SML have no intrinsic value to the investor.

Among the answer options, select the most secure, cheapest security:

Senior debt

What is the risk measure associated with the capital market line ?

Standard Deviation

Which of the following statements is NOT true?

The betas of most stocks are constant over time.

When might the day prior to the actual transaction announcement not serve as the appropriate benchmark for establishing the "unaffected" share price?

The deal was widely rumored in the market

Following are the examples of real options except:

The option to invest in the only positive NPV project.

Which of the following statements is true regarding NPV profiles?

The point of intersection between the NPV profile and the X axis is the IRR of the project.

Which of the following usually occur with a stock dividend?

The price per share falls and no cash leaves the firm

Once value is determined using the DCF approach, why does the banker put the value conclusion in a football field display alongside valuation conclusions from the comparable analysis and precedent transaction approaches?

To illustrate the differences in valuation methods

A stock split increases the number of shares outstanding, while

Total owners equity remains constant

Which of the following statements about IRR is not true?

Using IRR to measure return assumes that all income earned over the investment horizon is reinvested at the cost of capital

In 2012 Amgen and Cisco Systems had a similar volatility. Amgen however had a much lower beta. Why is this?

While their volatilities are similar much more of the risk of Amgen's stock is diversifiable risk, whereas Cisco's stock has a much greater proportion of non-systematic risk

Do strategic buyers typically pay more than financial sponsors when making an acquisition, and if so why?

Yes, because they realize cost synergies.

A portfolio to the right of the market portfolio on the CML is:

a borrowing portfolio

The least likely common dividend policy practice is for managers to:

aim for a target payout ratio relying on forecasts of short term earnings.

The cost of a firm's equity

can be substantially higher than the firm's weighted average cost of capital

Investors are most likely to be indifferent between share repurchases and cash dividends when the:

capital gains tax rate equals tax rate on dividend income.

A manager should attempt to maximize the value of the firm by:

changing the capital structure if and only if the value of the firm increases

A measure of how well the returns of two risky assets move together is the:

covariance

Ratios must be compared to a benchmark. Comparing firms to other firms or to its industry is known as

cross sectional analysis.

A writer of a call option will want the value of the underlying asset to _______ and a buyer of a put option will want the value of the underlying asset to _______

decrease; decrease

Given that there are taxes but no bankruptcy, agent, and lost tax shield costs, as the proportion of debt in a company's capital structure increases, the value of the company:

increases.

When the Capital Asset Pricing Model is depicted graphically, the result is the

security market line.

As discussed in class, the empirical evidence from the M&A literature suggests that on average,

shareholders of the target firm gain, shareholders of the acquiring firm lose

Revenue synergies tend to be more ______ than cost synergies.

speculative

The CFO of Ole Miss Business informs the company's CEO that the value of the firm will be maximized when the weighted average cost of capital is minimized and that this minimization occurs when the company's debt to equity ratio is at a level where the marginal benefits of debt are exactly offset by the marginal costs of debt financing. The CFO most likely believes in the:

static trade-off theory

According to Modern Portfolio Theory, the idea that investors with different indifference curves will hold the same portfolio of risky securities is a result of:

the separation theorem

The law of one price implies:

two well diversified portfolios with the same beta should have the same expected return

The APV method to value a firm should be used

when the firm's level of debt is known over the life of the firm