Finance 310

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

Taxes                                     12                          

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)

1. Trade Credit terms  1.5/10 net 40

                Bank loan terms:  add-on interest loan of 8%

1. Trade Credit terms 1/10 net 40 with the same bank terms

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

1. Create an equal weighted portfolio and determine its expected return, risk and required return.
2. Is the portfolio a wise investment?  Explain.
3. Graph the SML and include an illustration of your answer to part b.