1 Summer 2021 670 T2 61 pointsDr. de la Torre Name___________________________ 2021 Page | 4 1.(5 points) Calculate the IRR, NPV and the MIRR for the following cash flows. Assume a reinvestment rate...

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1 Summer 2021 670 T2 61 pointsDr. de la Torre Name___________________________ 2021Page | 4 1.(5 points) Calculate the IRR, NPV and the MIRR for the following cash flows. Assume a reinvestment rate of 10%. How many potential IRRs could there possibly be? If you are not sure explain. 20003000500700800 0____________________________________________________ 145 (2,000)(400) (600) 2.(5 points) Knowing what you learned about risk-less hedges and the binomial option pricing model, calculate the value of the call with X=$50; S=$60; Two possible states: Good= $60; Bad =$40; Rf = 10% (2 points) How are the binomial and the Black/Scholes models related? 3.(5 points) Using the Black/Scholes Option Pricing Model, calculate the value of the call option given: S= 85;X=95;T=6 months;=.6;Rf=10% (1 pt) What is the intrinsic value of the call?_____________ (1 pt) If the exercise price would decrease, the value of the call would ___________? (1 pt) If the time to maturity were 3-months instead of six months, the value of the call would ___________? (1 pt) If the stock price where $65, the value of the call would ___________? (1 pt) What is the maximum value that a call can take? Why? (1 pt) What is the minimum value that a call can take? Why? (1 pt) What increase in price does the stock have to achieve in order to break-even? ___________ (1 pt) What is the time value of the call option?____________ (1 pt) If you buy a bottom-straddle what strategy are you trying to use? 4.(10) Points The Big Company™ is considering two pieces of machinery that perform the same repetitive task. The two alternatives available provide the following set of after-tax net cash flows. Assuming a required rate of return of 10%: Year Project A Project B 0 (60,000) (80,000) 1 22000 17000 2 22000 17000 3 22000 17000 4 22000 17000 5 17000 6 17000 7 17000 8 17000 Calculate the NPV for each project Calculate the IRR for each project. Calculate the uniform annual series (UAS) or the equivalent annual annuity (EAA) for each project. Compare the two projects using the replacement chain method (i.e. find the replacement chain value). Which project would you select? Calculate the discounted payback. (ii) Convert this to a rate of return. If the projects are independent, and cannot be reproduced which project do you select and explain why. 5.(5 points) For the above projects find the cross-over point, i.e. the discount rate where NPV’s are equal. Draw a rough draft of the two NPV profiles. Hint: figure out the NPV at a zero discount rate. At a discount rate of 12%, which project(s) would you select? At a discount rate of 20%, which project(s) would you select? 6. (8 points) State of the world Probability Security Returns X Security Returns Market Boom .30 .15 .20 Normal .40 .10 .07 Recession .30 .05 .03 E(Rx) .10 E(RMkt) .097 = .0015 = ? Is this distribution symmetrical? Calculate the covariance. Calculate the variance of the portfolio made up of 30% X and 70% of the Market. Find the Beta for the firm. Find the correlation coefficient. What does beta measure? 7.(8 points) Stock X just paid a dividend of $2.0 a share. Growth is expected to be 8% for 6-years and then 3% there on. Given E(RM) = 9% and Rf= 4% and using the beta from Problem 6, find P2. 8.(3 points) Explain how the efficient market hypothesis (EMH) may be inconsistent with the ideal of a positive NPV project. 9.(3 points) How are the Realized Compound Yield (RCY) and the MIRR related? In each case explain the factor that causes the use of each, i.e. why do we use each? 20211MBA 670 MBA 670 2 Mkt s 2 X s