MGMT e2000 Final Exam 2015

Question 1 Introduction?(3 parts, 19 minutes of content, 19 points total)

1a.A put option on Macrohard stock with a strike price of $36 has a time value of $1.50, and a premium of $4.00. What must be the price of the stock? Show your calculations.

1b.Is this put option in or out of the money? Explain.

1c.Explain thoroughly why increased volatility in the underlying stock price increases the premium of an option.

Question 2 Introduction

(2 parts, 11 minutes of content, 11 points total)

The following figures represent the equity situation of Dewey Cheatum & Howe, well-known producer of Miracle Cure—a guaranteed tonic for whatever ails you!

Authorized shares 12,000,000,000

Shares issued 5,500,000,000

Shares outstanding 4,500,000,000

Float 4,250,000,000

2a.If shares of Miracle Cure are selling for $15/share, what is the firm’s market capitalization? Show your calculation.

2b.How many shares must be in the treasury stock. Show your calculation.

3.Explain the difference between idiosyncratic or firm-specific risk, and market or systematic risk.

4.Assume the CAPM holds, and you are given the following values:

Expected return on Malware stock = 12%

Risk-free rate = 3%

Beta of Malware stock = 2

What is the expected return on the market? Show your calculation.

Question 5 Introduction

(2 parts, 20 minutes of content, 20 points total)

On Friday, December 12, the March 2016 S&P Index futures contract (i.e., the S&P contract which expires in March of next year) closed at 2000, down 40 points on the day. The value of the contract is set at 250 × the index.

5a.How much value did each contract lose on Friday? Show your work.

5b.You bought the contract during the day on Friday at 2010, and had to put up initial margin of $25,000. The maintenance margin is $12,500. At what contract price will you get a margin call? Explain.

6.Explain the difference between a general obligation bond and a revenue bond.

7.What is the face value of a zero coupon bond that has a yield of 8.5%, matures in 6 years, and is currently selling for $404.54? Round your answer to the nearest dollar. Show your work.

Question 8 Introduction

(3 parts, 30 minutes of content, 30 points total)

Johnny Fatcat withdraws $15,000 from his checking account at The DL Bank. He pays $10,000 to Sammy Loanshark, who puts the money in his checking account at The Sopranos Bank. Johnny uses the other $5,000 as paper for his hand-rolled cigarettes, all of which he smokes ("nothing smokes better than a $100 bill," he loves to tell his friends).

Assume that all banks hold only the required 10% reserves and always loan out the rest, and that no cash is held by the public.

8a.What is the ultimate net effect on the money supply in the economy? Show your work.

8b.Assume instead that Sammy uses the $10,000 he receives to pay back a loan from Bad Boys Bank. $8,000 goes to repay the loan itself, and $2,000 represents his interest payment.

Show the immediate changes on Bad Boys Bank’s balance sheet resulting from Sammy’s payment.

8c.Ultimately, what will be the total amount of new loans in the economy after Sammy’s payment? Show your work.