Questions & Solutions (for REVIEW before Final Exam FINC 5880) Mid Exam FINC 5880 Winter 2015 Note: QA are Questions of the Mid Exam of the Morning Cohort.

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Questions & Solutions (for REVIEW before Final Exam FINC 5880) Mid Exam FINC 5880 Winter 2015 Note: QA are Questions of the Mid Exam of the Morning Cohort and QB are Questions of the Mid Exam for the Afternoon Cohort; you may want to have a look at BOTH!

Question 1A: Beta’s ( a)10 points;b) 15 points)

Answer

Question 1B: Beta’s (a) 10 points; b) 15 points)

Answer

Q2A: Capital structure (25 points)

Answer Q2A:

Q2B: Capital structure (a) 10 points ; b) 15 points)

Answer Q2B

Q3A: Dividend Policy (a) 10 points; b) 15 points)

Q3A Answer

Q3B: Dividend Policy (a) 10 points; b) 15 points)

Q3B Answer

Q4A: Option Valuation (25 points) On 16 November 2015 the SBUX Call with X=$60 maturing 16 January 2016 costs $ )Assuming that the stock up to maturity will stay between Sd=$55 and Su=$65 and Rf=2% per year, calculate the Theoretical value of the Call with the Binomial model (the spot price of SBUX on 16 November was $60) SHOW YOUR CALCULATION (10 points) 2)Calculate the value of the Call according to the Black Scholes (BS) model; list the inputs in the yellow cells on your answer sheet. The variance on SBUX stock returns is 10.24%. (2 points) 3)Now calculate the value of the Put with X=$60 and the same maturity (i.e. 2 months) both based on the Binomial model and the BS model. SHOW YOUR CALCULATION (3 points) 4)If your calculated value in 1) is correct, given the market price of $ 2.37, what could you do with ARBITRAGE to risk free gain the price difference? SHOW YOUR CALCULATION AND STRATEGY (10 points)

Q4B: Option Valuation (25 points) On 16 November 2015 the MCD Call with X=$110 maturing 16 December 2015 costs $ )Assuming that the stock up to maturity will stay between Sd=$105 and Su=$115 and Rf=2% per year, calculate the Theoretical value of the Call with the Binomial model (the spot price of SBUX on 16 November was $110) SHOW YOUR CALCULATION (10 points) 2)Calculate the value of the Call according to the Black Scholes (BS) model; list the inputs in the yellow cells on your answer sheet. The variance on MCD stock returns is 6.76%. (2 points) 3)Now calculate the value of the Put with X=$110 and the same maturity (i.e. 1 month) both based on the Binomial model and the BS model. SHOW YOUR CALCULATION (3 points) 4)If your calculated value in 1) is correct, given the market price of $ 2.42, what could you do with ARBITRAGE to risk free gain the price difference? SHOW YOUR CALCULATION AND STRATEGY (10 points)