Final Quiz Fall 2013
Answer each of the following questions.
1. One year ago, a U.S. investor converted dollars to Euros and purchased 100 shares of stock in a French company at a price of €50 per share. The stock’s total purchase cost was €5,000. At the time of purchase, in the currency market $1.3/€. Today, the stock is selling at a price of €55 per share, and in the currency market $1.25/€. The stock does not pay a dividend. If the investor were to sell the stock today and convert the proceeds back to dollars, what would be his realized return on his initial dollar investment from holding the stock? (15)
2. Answer the following questions (15)
a) A 2-month call option on Apple’s stock has a strike price of $575 and sells in the market for $19.25. Apple’s current stock price is $580. What is the option premium?
b) A 2-month put option on Apple’s stock has a strike price of $590 and sells in the market for $34.50. What is the exercise value of the option?
c) A 6-month call option on Romer Technologies’ stock has a strike price of $45 and sells in the market for $8.25. Romer’s current stock price is $48. What is the exercise value of the option and the option premium?
3. . Toni Jamison is responsible for forecasting Downhill’s cash requirements for the next three months of the year. Her sales forecasts and cost estimates in the thousands are the following:
Dec Jan Feb
Sales 160 40 60
Purchases 40 40 40
Rent 2 2 2
Salaries 4.8 4.8 4.8
Depreciation 7 7 7
Sales are made only on a cash basis and purchases must be paid during the following month. Purchases in November were $140,000. Ms. Jamison expects to have no cash at the beginning of December, but wants to sustain a target balance of $6,000 in the future. (15)
a. Construct a cash budget for the three months including any surplus or shortage.
b. What can the firm do with a cash surplus?
4. Over the next 4 years, the FCFs (in millions) for a company are estimated as -$10, -$5, $15, $25. After that FCFs will grow at a constant rate of 5%. If the WACC is 10% estimate the fair price of the stock? The company has $50M in debt and $15M in preferred stock with 10M in shares outstanding. (20)
5. Given the following information on trade credit and a bank loan, tell me whether the company ought to borrow from the bank and take the discount or not. (15)
Bank loan terms: add-on interest loan of 8%
6. Given the following information, answer the questions below: (20)
Risk free rate: 2%
Market rate: 12%
Stock Expected Return Beta
IBM 8% 0.7
GE 12 1.4
GOOG 16 1.25
AAPL 25 0.9