The number of common shares outstanding of a firm = 1,000. Stock price = $20/share. EPS = $2/share every year. This firm plans to issue new shares to raise $10,000, which will be invested in a new project. Managers expect this new project to generate $1,200 every year. However, new shareholders believe that this new project will generate annual cash inflow of $1,500 forever. Assume that (1) the required rate of return on new shares = 10%, and (2) the price of new stock is based on the belief of new shareholders. Accordingly, the price of new stock = X.

1.

X值會落在以下哪一個區間？

 

(A)

20~21

(B)

21.1~21.5

(C)

21.6~22

(D)

22.1~23

(E)

23.1~24

(F)

24.1~25

(G)

25.1~26

(H)

lower than 20

(I)

higher than 26

(J)

None of the above

The number of common shares outstanding of a firm = 1,000. Stock price = $20/share. EPS = $2/share every year. This firm plans to issue new shares to raise $10,000, which will be invested in a new project. Managers expect this new project to generate $1,200 every year. However, new shareholders believe that this new project will generate annual cash inflow of $1,500 forever. Assume that (1) the required rate of return on new shares = 10%, and (2) the price of new stock is based on the belief of new shareholders. Accordingly, the price of new stock = X.

2.

What is the REALIZED EPS after the stock issuance if managers’ information is correct?

 

(A)

3.0~2.9

(B)

2.9~2.8

(C)

2.8~2.7

(D)

2.7~2.6

(E)

2.6~2.5

(F)

2.5~2.4

(G)

2.4~2.3

(H)

2.3~2.2

(I)

2.2~2.0

(J)

None of the above

The value of stock index futures per contract is $1 million. The deposit (as defined by margin requirement) per contract is $100,000. Your own capital is $6 millions. The Beta of your investment position is 5, while the stock market portfolio’s Beta is 1. Risk-free rate = 5%. Cash dividend yield = 2%. Stock index now = 8,000. To achieve your target Beta at 5, you should (1) by X contracts of this futures, and (2) buy $Y of government bond.

3.

The value of X will be:

(A)

30~40

(B)

40~50

(C)

50~60

(D)

60~70

(E)

70~80

(F)

smaller than or equal to 29

(G)

larger than or equal to 81

The value of stock index futures per contract is $1 million. The deposit (as defined by margin requirement) per contract is $100,000. Your own capital is $6 millions. The Beta of your investment position is 5, while the stock market portfolio’s Beta is 1. Risk-free rate = 5%. Cash dividend yield = 2%. Stock index now = 8,000. To achieve your target Beta at 5, you should (1) by X contracts of this futures, and (2) buy $Y of government bond.

4.

The value of Y should be:

 

(A)

2.0 million~2.9 million

(B)

3.0 million~3.9 million

(C)

4.0 million~4.9 million

(D)

5.0 million~5.9 million

(E)

smaller than 2.0 million

(F)

6.0 million

5.

(A)

0~0.1

(B)

0.11~0.2

(C)

0.21~0.3

(D)

0.31~0.4

(E)

0.41~0.5

(F)

higher than 0.5

(G)

-0.41~-0.5

(H)

-0.31~-0.4

(I)

-0.21~-0.3

(J)

0~-0.2

6.

According to MM Theory (no tax, no information asymmetry), how many of the following will remain the same if a company borrows and then uses the loan to buy back the stock: Expected return on equity, cost of the company’s capital, stock price, stock’s risk, risk on the company’s assets:

 

(A)

0

(B)

1

(C)

2

(D)

3

(E)

4

(F)

5

7.

The major difference between options and futures is

 

(A)

the type of underlying asset

(B)

the type of underlying asset

(C)

the multiplier of the contract

(D)

the obligation or right to exercise the contract

(E)

The two are basically the same

8.

Can we identify the size effect based on the following table?

ME/BE of stock	Observed annual stock return	Beta (i.e., b)
1 = the smallest	20%	1.2
2	15%	1.1
3	12%	1.0
4	6%	0.9
5 = the largest	4%	0.8
Risk-free rate = 2% a year. ME/BE = market value of equity ÷ book value of equity. Suppose the market portfolio is the equally-weighted stock index.

 

(A)

Yes

(B)

No

9.

You have $10,000. ETF price = $100/share. Call option on ETF (exercise = $110, maturity = 1 year) is priced at $10/unit. Put option on ETF (exercise price = $90, maturity = 1 year) is price at $10/unit. You buy ETF for $9,000, buy put option on ETF for $1,000, hold on for 1 year. What is your largest possible loss?

 

(A)

0~-0.5%

(B)

-5.1%~-10.0%

(C)

-10.1%~-20.0%

(D)

-20.1%~-30.0%

(E)

None of the above

10.

Which of the following observations would provide evidence against the strong form of efficient market theory? (I) Mutual fund managers do not on average make superior returns (II) In any year approximately 50% of all pension funds outperform the market (III) Managers who trade in their own firm’s stocks make positive abnormal returns.

 

(A)

I only

(B)

II only

(C)

I and II only

(D)

III only

(E)

I and III

(F)

II and III

(G)

None of the above

11.

The fact that stock abnormal returns over 3 years following IPO are positive is:

 

(A)

consistent with weak-form market efficiency

(B)

consistent with semi-strong-form market efficiency

(C)

consistent with strong-form market efficiency

(D)

The above three answers are correct

(E)

inconsistent with weak-form market efficiency

(F)

inconsistent with semi-strong-form market efficiency

(G)

inconsistent with strong-form market efficiency

(H)

None of the above

12.

The opportunity to defer investing to a later data may have value because:

 

(A)

the cost of capital may increase in the near future

(B)

uncertainty may be increased in the future

(C)

Investment costs fluctuate over time

(D)

Interest rate may go up in the future

(E)

Market conditions may change and increase the NPV of the project

13.

Buying the stock and the put option on the stock provides the same payoff as:

 

(A)

Short selling stock and buying a call option on stock

(B)

Investing the present value of the exercise price in government bond and buying the call option on stock

(C)

Writing (selling) a put option and buying a call option on stock

(D)

None of above

14.

Which of the following is most likely used to reduce the risk of negative interest rate spread (負利差) facing the insurance industry?

 

(A)

buy put option on interest rate

(B)

buy interest rate futures

(C)

sell call option on interest rate

(D)

sell interest rate swap

(E)

buy short-term government bond

(F)

None of the above

15.

Firm A is planning to acquire Firm B. If Firm A prefers to make a stock offer for the merger, it empirically indicates that:

 

(A)

Firm A’s managers are optimistic about the post merger value of A

(B)

Firm A’s managers are pessimistic about the post merger value of A

(C)

Firm A’s managers are neutral about the post merger value of A

(D)

The market is efficient

16.

Under what conditions would a policy of maximizing the value of the entire company not be the same as a policy of maximizing shareholders’ wealth?

 

(A)

If an issue of debt affects the value of existing debt

(B)

If the issue of debt increases the probability of bankruptcy

(C)

If the firm issues debt for the first time

(D)

If the beta of equity is changed when the company changes the capital structure

17.

Normal and lognormal distributions of stock returns are completely specified (summarized) by:

 

(A)

mean

(B)

standard deviation

(C)

third moment

(D)

(1), (2) and (3) above

(E)

(1) and (2) above

(F)

None of the above

The following data on a merger is given:

	Firm A	Firm B	Firm A + B (after merger)
Price per share	$100	$10
Total earnings	$500	$300
Shares outstanding	100	40
Total value	$10,000	$400	$11,000

 

18.

Firm A has proposed to acquire Firm B at a price of $20 per share for Firm B’s stock. Calculate A’s NPV from the merger.

(A)

Lower than $100

(B)

101~150

(C)

151~200

(D)

201~250

(E)

251~300

(F)

301~400

(G)

401~500

(H)

Higher than 500

The following data on a merger is given:

	Firm A	Firm B	Firm A + B (after merger)
Price per share	$100	$10
Total earnings	$500	$300
Shares outstanding	100	40
Total value	$10,000	$400	$11,000

 

19.

(Using the information of above question) If firm A pays in cash, the post-merger-announcement price per share for Firm A’s stock = X. The post-merger-announcement per share price for Firm B’s stock = Y. Then, X-Y=?

(A)

0~50

(B)

51~100

(C)

101~150

(D)

151~200

(E)

None of the above

20.

A call option has an exercise price of $150. At the final exercise date, the stock price could be either $100 or $200. Which investment would combine to give the same payoff as the stock?

 

(A)

Lend PV of $100 and buy two calls

(B)

Lend $100 and buy two calls

(C)

Lend PV of $100 and sell two calls

(D)

Lend $100 and sell two calls

(E)

Borrow PV of $100 and buy two calls

(F)

Borrow $100 and buy two calls

(G)

Borrow PV of $100 and sell two calls

(H)

Borrow $100 and sell two calls

(I)

None of the above