Question 1: (a)What is NPV for project A? (b) what is the IRR for

| June 1, 2016

Question
Question 1:

(a)What is NPV for project A?

(b) what is the IRR for project B?

(c) which project will you choose A or B?

Discount rate

11%

Year

Project A

Project B

0

-1000

-800

1

500

420

2

500

420

3

500

420

4

500

420

5

500

420

6

200

300

7

350

300

8

360

300

9

200

450

10

200

260

11

200

260

NPV

IRR

Question 2:

(a)-(d) based on the following.

Suppose you write a IBM call which was sold for $7.00 on Apr 9 2013 with exercise price X=$110, on Expiration date July 19,2013, given different possibilities of market prices, please answer. Hint: Profit/ loss is not payoff.

ST: Market price
of IBM
19 July 2013

Will call
buyer exercise
the call?(yes or no)

Dollar
profit/loss
to call writer

0

80

90

100

110

120

130

140

150

160

170

180

190

(a) Will call buyer exercise the call when market price on July 19 is $90? Please answer YES or NO.

(b)Will call buyer exercise the call when market price on July 19 is $130? Please answer YES or NO.

(c) How much is profit/loss for call writer( who writes a call) if the market price on July 19 is $100?

(d) How much is the profit/loss for a call writer when market price on July 19 is $140?

Question 3:

ABC company’s current FCF is $2,000,000, it will grown at 25% for the first 4 years and back to a steady growth rate 7% after 4 years. The WACC is 10%, outstanding shares is 4,000,000. Please use FCF model to estimate the value of their stock. Assume all FCFs happen at the end period.

Current FCF

2,000,000

Anticipated growth rate, years 1-4

25%

WACC

10%

Long-term growth rate, after year 4

7%

Number of shares outstanding

4,000,000

(a) what is FCF at the end of year 2?

(b) what is FCF at year 5?

(c) What is the terminal value at the end of year 4?

(d) What is the forecast stock price per share?

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