See attachment Multiple Questions regarding options, bond pricing, time value of money, investment, and bond valuations
(3 points) The price of SPDR S&P 500 ETF (ticker: SPY) on March 10 was $390/share. You paid $4.5/share to buy a call option on SPY with a strike price of $390 and maturity date of March 19th. a). On March 19th, if the SPY price is $385 per share, should you exercise this option? Based on your choice, what is the payoff from this option? What is the profit from buying this option? Answer: b). On March 19th, if the SPY price is $393 per share, should you exercise this option? Based on your choice, what is the payoff from this option? What is the profit from buying this option? Answer: c). On March 19th, if the SPY price is $398 per share, should you exercise this option? Based on your choice, what is the payoff from this option? What is the profit from buying this option? Answer: (3 points) A stock is worth $97. A European put option with strike price of $95 and one year to maturity on this stock has a market price of $3. How much will it cost you if you buy 100 shares of stock and 100 shares (also referred to as one contract) of the put option? (You have constructed a protective put strategy.) This is the initial value of your portfolio. Answer: After one year, what is the value of your portfolio if the stock price is $50? What is the percentage return of your investment? Answer: After one year, what is the value of your portfolio if the stock price is $150? What is the percentage return of your investment? Answer: 3.(3 points) A gold miner expects to have 1,000 ounces of gold to sell in three months. The gold futures contract on the Chicago Mercantile Exchange (CME) is for the delivery of 100 ounces of gold. How can the miner hedge the risk of gold price change? If the spot market price of gold rises, will the miner gain or lose from the futures position? What is the advantage of this hedge? What is the disadvantage of this hedge? Answer: (3 points) One of the main causes for the 2007-2009 financial crisis is due to the burst of hosing bubble. Based on our slides, what is the magnitude of peak-to-trough decline in the national Case-Shiller Home Price Index from the second quarter of 2006 to the first quarter of 2009? Briefly describe how the securitization of asset backed securities (ABS) works. Answer: (3 points) The dot com bubble burst in 2000. Based on our slides, what is the Nasdaq index level on March 10, 2000? what is the Nasdaq index level on October 9, 2002? What is the percentage return of this index during this peak-to-trough period? Answer: (3 points) On March 10, 2021, Apple Inc. (AAPL) had a share price of $199.98. Based on the earnings per share (EPS) of 3.69 in the past 12 months, what’s AAPL's price-earnings ratio (P/E)? If the book value of equity per share is $3.94, what is the return on equity for AAPL? Answer: (3 points) (a) As a portfolio manager, if you are deciding whether to add the corporate bonds of a company into your portfolio, what set of ratios of the company would you look at? Answer: (b) If your company is interested in acquiring another firm, what ratios will tell you whether that firm is profitable or not? What ratios will tell you the operational efficiency of the firm? Answer: (c) What ratios can help you tell whether a company is overvalued or not? Answer: (3 points) Suppose you started a Web site hosting business and then decided to return to school. Now that you are back in school, you are considering selling the business within the next year. An investor has offered to buy the business for $200,000 whenever you are ready. If the interest rate is 10%, what is each of following choices’ present value to you? which of the following three alternatives is the best choice? A)Sell the business now. B)Scale back the business and continue running it while you are in school for one more year, and then sell the business (requiring you to spend $10,000 on expenses now, but generating $50,000 in profit at the end of the year). C)Hire someone to manage the business while you are in school for one more year, and then sell the business (requiring you to spend $60,000 on expenses now, but generating $100,000 in profit at the end of the year). Answer: (3 points) (a) If the nominal interest rate is 1% per year and the inflation is 3% per year, what is the growth rate in purchasing power (also referred to as the real interest rate)? Answer: (b) if an investor hopes to earn a real rate of 5% per year, with an inflation of 15% per year, what nominal rate of return is needed? (Please keep 4 digits for your answer.) Answer: (c) Matt Burker is saving for retirement and has determined that to live comfortably he must save $3 million by his 65th birthday. Matt just turned 30 today, and he has decided that starting today and continuing on every birthday up to and including his 65th birthday, he will deposit the same amount into an individual retirement account (IRA). If Matt can earn a nominal rate of 8% on his IRA, then the amount he must set aside each year to make sure that he will have $3 million in his account on his 65th birthday is closest to: Answer: (3 points) (a) What’s the intuition behind the Net Present Value (NPV) calculation? What are the main steps for you to estimate the NPV of an investment project? When you use the NPV to decide whether to accept an independent project without any constraint, what’s the minimum acceptance criteria? Answer: (b) You are interested in the valuation of a house using discounted future cash flows. After a set of analysis, the estimated net cash inflow at the end of each month will be $3000 per month after all maintenance and other costs. Assuming this cash inflow is likely to last forever in real dollars (i.e. in purchasing power), the real rate to finance this deal from a fixed-rate interest only mortgage with infinite-year term is 3% APR (hint: the real interest rate is 0.25% per month). What’s the fair value of this house? If the market price for this house is $1,000,000 and you have no any other constraint nor market friction, should you invest in this house? How much money can you make (or you may lose) in today’s dollars if you do invest (Hint: the Net Present Value (NPV) of this potential investment)? Answer: (3 points) (a) What are the main advantages and disadvantages to use payback period to make investment decisions? Answer: (b) What is the payback period of the following project? If the required payback period is 3 years, should you accept the project? Answer: (3 points) (a) When you use the internal rate of return (IRR) to make an investment decision, how can you calculate the IRR of a project? What is the decision rule to use the IRR to decide whether to accept a standalone project without any constraint? What does the reinvestment assumption behind the IRR mean? What are the main advantages and disadvantages of the IRR decision rule? Answer: (b) What is the IRR of the following project? The project requires an investment of $2,000,000 today and will provide $500,000 one year from now, $900,000 two years from now, and $1,300,000 three years from now. Answer: (3 points) (a) How to calculate the profitability index (PI) for each project? When and how do you use the PI to make an investment decision? Answer: (b) What is the profitability index (using our textbook definition) for an investment with the following cash flows given a 10% required return? Answer: (3 points) Please answer the following question based on the CFA Standards of Practice Handbook. Government officials approach Doris Wang, the portfolio manager for Smith Company’s pension plan, to examine pension fund records. They tell her that Smith’s corporate tax returns are being audited and the pension fund is being reviewed. Two days earlier, Doris had learned in a regular investment review with Smith officers that potentially excessive and improper charges were being made to the pension plan by Smith. Doris consults her employer’s general counsel and is advised that Smith has probably violated tax and fiduciary regulations and laws. What’s the best actions for Doris regarding the activities of Smith officers? Answer: (15 points) BMBA 9460 group is carrying out a set of analysis to decide whether to start a new company called BMBA Starters Inc (BS). If we start BS in 2021, BS will have no sales in 2021. BS is expected to have sales of $10 million in 2022 and the sales will grow at the rate of 50% in 2023; 100% in 2024; 30% in 2025; and 3% from 2026 on forever. We expect that net income will be 48% of sales (based on the estimation that EBIT to be 60% of sales and we have to pay a corporate tax rate of 20%). We expect that increases in net working capital requirements to be 5% of any increase in sales, capital expenditures to be 9% of sales, and depreciation expenses to be 6% of sales. The weighted average cost of capital is estimated to be 12%. To start the company, we need to invest $50 million at the end of 2021. Should we start the new company? If we are planning for an IPO at the beginning of 2022 to sell all the equity for 10 million shares, what is the fair price for each share of our company stock? The following sub-questions and table may be helpful: More specifically, the sales in 2027 is calculated as __________× _________ = __________; the net income in 2027 is calculated as __________× _________ = __________; the depreciation in 2027 is calculated as __________× _________ = __________; the capital expenditure in 2027 is calculated as __________× _________ = __________; the increase in the net working capital in 2027 is calculated as __________________________________________ = __________; the free cash flow in 2027 is calculated as ___________________________________________________________ = __________; the terminal firm value at the beginning of 2027 is calculated as ___________________________________________________________ = __________; the total firm value at the beginning of 2022 is calculated as ___________________________________________________________ = __________; the fair stock price at the IPO is calculated as ____________________________________________________ = __________per share; the NPV of this project before we make any investment is calculated as (You can either write the formula for the NPV calculation, the financial calculator keys, or Excel formula that you use to calculate the NPV here.) ___________________________________________________________ = __________; based on this NPV, we ___________________(should or shouldn’t) start the new company. Extra point question: The