16. (6 points) Lesley buys two shares of stock at a price of $100 today, and one put option with an exercise price of $90 two years from now. (In other words, the expiration date of the option is two years from now.) The put option is for selling one share. For simplicity in this problem, you can assume that the discount rate is 0%. Draw a well-labeled graph that shows the value of a combination of the two shares of stock and the put option as a function of the value of stock at expiration. The vertical intercept should have the value of the combination of the stock and the put. The horizontal intercept should have the value of the stock at the expiration. Make sure to label your intercepts and other relevant numbers on each axis, where relevant. (Hint: You may want to look at the front page of the test to see a well-labeled graph.) Explain your answer in words, math, and/or using additional graphs. 17. (5 points) Aubrey’s Waffles currently has $200,000 of stock issued, with no bonds. The current cost of equity is 10%. If the company sells $25,000 of bonds and uses this money to purchase $25,000 worth of stock, what is the new cost of equity? Assume that the cost of debt is 5% and that there are no other securities issued by Aubrey’s Waffles. You can also assume that the weighted average cost of capital is constant. NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS Logarithmic rule EXPLICITLY SPECIFIED ON THE TEST. = ab c b = log c / log a Perpetuity Variance of a sample Variance of a distribution, with each outcome having the same probability of occurring Annuity Covariance formula Growing perpetuity Correlation of A and B Growing annuity , where SD stands for standard deviation Variance of a portfolio Quadratic formula + + = 0 ax2 bx c
16. (6 points) Lesley buys two shares of stock at a price of $100 today, and one put option with an exercise price of $90 two years from now. (In other words, the expiration date of the option is two years from now.) The put option is for selling one share. For simplicity in this problem, you can assume that the discount rate is 0%. Draw a well-labeled graph that shows the value of a combination of the two shares of stock and the put option as a function of the value of stock at expiration. The vertical intercept should have the value of the combination of the stock and the put. The horizontal intercept should have the value of the stock at the expiration. Make sure to label your intercepts and other relevant numbers on each axis, where relevant. (Hint: You may want to look at the front page of the test to see a well-labeled graph.) Explain your answer in words, math, and/or using additional graphs. 17. (5 points) Aubrey’s Waffles currently has $200,000 of stock issued, with no bonds. The current cost of equity is 10%. If the company sells $25,000 of bonds and uses this money to purchase $25,000 worth of stock, what is the new cost of equity? Assume that the cost of debt is 5% and that there are no other securities issued by Aubrey’s Waffles. You can also assume that the weighted average cost of capital is constant. NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS EXPLICITLY SPECIFIED ON THE TEST. Perpetuity Annuity Growing perpetuity Growing annuity Quadratic formula ax2 + bx + c = 0 Logarithmic rule ab = c b = log c / log a Variance of a sample Variance of a distribution, with each outcome having the same probability of occurring Covariance formula Correlation of A and B , where SD stands for standard deviation Variance of a portfolio
Test3A_Fall2015.docx