Order Book Example Buy Orders (Bids) Amount Price 63 $42.15 36 $42.12 112 $41.99 3 $41.88 Sell Orders (Asks) Amount Price 3 $42.16 68 $42.22 113 $42.25 9 $42.44 What is the spread for this security after an investor submits a sell order for 185 shares at $41.87? $0.17 $0.01 $0.28 $0.29 Decide whether Company A is a buy or sell depending on the following information: Company A: P/E Ratio: 8.12x Share Price: $29.08 Comparable Company Analysis Company P/E Ratio Company B 7.3x Company C 6.8x Company D 5.3x Company E 5.5x Company F 15.2x DCF Analysis Intrinsic value of Company A is $28.91. Buy Hold Inconclusive Sell Why might an investor pursue a shorting strategy against the airline industry? Select all that apply. Anticipates airline stock values will decrease Hedge a current investment Choose the investment strategies which each investor is most likely to pursue. Investor B believes the market will go up more than down, and plans to buy more if it dips again Investor D believes the market will go down more than up Investor C believes the market won't fluctuate much and has a long time horizon Investor A believes company A (financial sector) is undervalued, but company B (financial sector) is overvalued Long Strategy Short Strategy Buy-and-Hold Strategy Long-and-Short Strategy An investor planning to retire in two years and cash out his portfolio should pursue what type of investment strategy? Shorting strategy Capital preservation Market timing Invest in growth stocks
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1. For two options, a call and a put, holding everything else constant, what will happen to the option price when: 1. volatility increases; 2. risk-free rate increases? A. Both call and put prices go down when volatility increases; both call and put prices go up when risk-free rate increases. B. Call price goes up and put price goes down when volatility increases; call price goes down and put price goes up when risk-free rate increases. C. Both call and put prices go up when volatility increases; call price goes down and put price goes up when risk-free rate increases. D. Both call and put prices go up when volatility increases; call price goes up and put price goes down when risk-free rate increases. 2. For a European call option, spot price is $100, strike price is $90, interest rate is 5%, maturity is 3 months, which of the following is a valid range for the option price? A. ($11.12, $100) B. ($9.34, $100) C. ($11.12, $90) D. ($9.34, $90) 3. Two options are written on the same underlying stock, which does not pay any dividend. Strike price is $100. Interest rate is 8%. Maturity is 4 months. Spot price is $100. Put premium is $4. Call premium is $5.6. Does there exist an arbitrage opportunity? If so, what is the arbitrage strategy in terms of your position in the call and put options? A. Yes. Long call, short put. B. Yes. Long put, short call. C. No. D. Undetermined. 4. A calendar spread using calls consists of a long call (E) with a maturity of 2 months, and a short call (F) with a maturity of 1 month. The strike price is the same and is $100. After a month, spot price becomes $105. Which of the following statement is correct? A. You gain from E and lose from F; overall profit tends to be negative B. You gain from F and lose from E; overall profit tends to be negative C. You gain from E and lose from F; overall profit tends to be positive D. You gain from F and lose from E; overall profit tends to be positive
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A stock market advisory service offers three investments portfolios for one of its customers. All portfolios have the same investment cost. Portfolio A contains speculative stocks, which aim for capital gain through price appreciation. Portfolio B is made up of stocks of stable companies that pay good dividends overt the long run. Portfolio C comprises stocks with a moderate potential for growth and a moderate yield of dividends. The customer has enough money to invest in only one of these three portfolios for a period of one year. The net return on investments will depend on whether the economy during the period will be in a stage of inflation, recession, or depression. The net potential gains or losses are calculated as follows: STATES OF NATURE TABLE NUMBERS in ten-thousands: ⇓ Inflation Recession Depression ALTERNATIVES Portfolio A $ 80 $ 50 $ – 50 Portfolio B $ 70 $ 45 $ – 30 Portfolio C $ 60 $ 30 $ – 20 1. What would be the decision according to (1) Maximax (optimism); (2) Maximin (pessimism); (3) Realism where α = .7; (4) Equal Likelihood; and, (5) Minimizing Regret? Be sure to show work and indicate the recommended alternative each time. AFTER SHOWING ALL WORK, SUMMARIZE/RECAP: DMUU: Letter Answer Reason Perfect Optimism: MXMX Perfect Pessimism: MXMN Optimism at α =___: REALISM Equal Likelihood: EQL LK'HD Minimizing Regret: REGRET Overall DMUU: ________________ (Give Reasons!)
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A firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Source of capital Target market proportions Long-term debt 30% Preferred stock 5% Common stock equity 65% Debt: The firm can sell a 20-year, RM1,000 par value, 9% bond for RM980. A flotation cost of 2% of the face value would be required in addition to the discount of RM20. Preferred stock: The firm has determined it can issue preferred stock at RM65 per share par value. The stock will pay an RM8.00 annual dividend. The cost of issuing and selling the stock is RM3 per share. Common stock: The firm's common stock is currently selling for RM40 per share. The dividend expected to be paid at the end of the coming year is RM5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was RM3.45. It is expected to sell a new common stock issue must be underpriced at RM1 per share, and the firm must pay RM1 per share in flotation costs. Additionally, the firm's marginal tax rate is 40%. Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.
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