FIN 350

Question 1

part 1 forecast

prediction is the fitted value

Answer 1

You can do a linear fit instead of using the (average of) constant growth model which is an exponential function. The latter makes a bit more sense; On the other hand, linear fit seems to be technically more complicated with Excel. Interested students can use a software program called Origin for any types of curve-fittings… very easy.

Question 2

Short-term investments

Answer 2

This term is positive only when the firm has extra fund. Since it needs to raise additional fund, we assume this term remains zero as 2024 because it won’t invest extra funds in a bank while it tries to borrow from the banks

Question 3

Notes payable

Answer 3

It is unnecessary, but if you want, you can insert the “short-fall” of $229.5 found in Step 31 in here and the total Liab+Equity will equal the forecasted assets of $2,200.00

Question 4

interest

Answer 4

ST debt rate x N/P + LT debt rate x LT debt

Question 5

common dividends

Answer 5

dividend grow from last year

Question 6

addition to retained earning

Answer 6

net income - common dividend

Question 7

internal fund

Answer 7

is from retain earning

Question 8

external fund

Answer 8

is called AFN

Question 9

retained earning

Answer 9

this year plus addition RE in income statement of last year

Question 10

Financial options are

Answer 10

financial contracts whose value derives from (or depends on) the underlying financial assets (e.g., stocks). Thus, they are called financial derivatives.

Question 11

A call option gives

Answer 11

the owner the right to buy stock at a specified price K – strike, strike price, or exercise price.

Question 12

American Call

Answer 12

can be exercised any time before the maturity T.

Question 13

European Call

Answer 13

can only be exercised at maturity T.

Question 14

Covered Call

Answer 14

if the seller (writer) of a call option has (100 shares of) the underlying stock, the seller is “covered”.

Question 15

Naked Call:

Answer 15

the call seller does not own the stock. Therefore, if the buyer (owner) decides to exercise the call, the seller has to buy shares from the market.

Question 16

Out-of-the-money

Answer 16

when the strike price K > current stock price S0

Question 17

In-the-money

Answer 17

when K < S0

Question 18

A put option gives

Answer 18

the owner the right to sell stock at a specified price K – strike, strike price, or exercise price.

We only consider European put options, which can be exercised only at maturity T.

Question 19

the payoff is

Answer 19

the potential profit

Question 20

Option Pricing Models

Answer 20

the Binomial Approach Assume that at maturity T, there are two possible scenarios:

1. (1) Stock price moves up to SU (2) Or moves down to SD

Therefore there are two possible call payoffs: (1) XU (2) XD

Question 21

Question: If we know the above payoffs, what is the call option with now?

Answer 21

if the it is in-the-money, the payoffs would be Su * share - y*(1+rf)^T

Question 22

the portfolio value is

Answer 22

the difference of stock value and loan own

Question 23

Matching the portfolio payoff and the call option’s payoff

Answer 23

using the continue compounding or discrete compounding

Question 24

the profit of call option is

Answer 24

MAX(ST-K, 0)

Question 25

put-call parity

Answer 25

S0 + P = C + Ke^(-rf*T)

Question 26

At T, the two portfolios have ____payoffs, regardless of the probabilities.

Answer 26

identical