ABSOLUTELY! Beta is measured as covariance divided by variance. Since covariance is the multiplied variances of the market and the stock and since the variances are squared volatilities there should alway be a relationship.
Q15 must be totally wrong. I mean how can their earnings per share increase above their combined one without any added value?
Can anyone confirm this too...?
It is wrong. They are actually asking for the price to earning ratio. In fact, if you do 20/EPS with EPS as 1,91 you get 10,41 that is in the answers. Just a very stupid mistake when formulating the question that makes you loose a lot of time and should be very easy for them to identify. Very very very superficial way of preparing a university exam.
53) p. 905: " Municipal bonds (“munis”) are issued by state and local governments. Their distinguish- ing characteristic is that the income on municipal bonds is not taxable at the federal level. (..). Some issues are also exempt from state and local taxes"
He has to be kidding if he says that c) is a wrong statement only because some are exempt from local taxes..
The reponse is B because : page 861 of the book : "Angel investors often circumvent this problem by hold- ing a convertible note rather than equity. In a typical deal, in exchange for their invest- ment, angels receive a note that is convertible into equity when the company finances with equity for the first time." accrued interest is never mentioned :)
Couldn't one argue that d) is also a correct answer? Since the option prices are observable in the market and with that and the black-scholes-formula you can calculate the implied volatility
31) What is the reasoning behind statement d) ? I get that an interest income tax rate of 51% corresponds to an effective tax rate of 0, but why would a higher tax rate lead to the fact that less taxes have to be paid?
Well...damn...I got 30/60, surely with that I won't pass, right? I am still gonna complain about 7 questions, hoping for the best. Good luck to the others, hope you do better than I did.
There were at least 10 questions in which you could argue either for more than one answer or for no correct answer. I am an exchange student, can someone tell me how to see the questions again and then complain about them? Or was I supposed to copy the whole freaking questions and take them with me? I marked them with stars, but I forgot the details of each question.
I think what A is saying, that all other firms in the industry who are not part of the acquisition, the acquisition will not lead to a decrease of their stock price.
So not if the acquisition isnt succesful, just the fact that other firms' stocks arent negatively affected
whoever made the question is just being sneaky.
Required return = E(Ri)
sensitivity to the market risk = Beta
Treasury bills returns = the risk free rate
Market portfolio returns = market return
So, Ri = 3 + 0.75*(7-3)
I dont know how to immediately calculate the put price, but you can calculate the price of an identical call option and then use the put-call parity to calculate the put option
1. Under CAPM, return is only compensated through market risk and not idiosyncratic risk. Only beta and expected returns count, so you can cross out A,B and D because they have a higher beta than C but a lower expected return.
Why is it B?
On page 1031: "Besides increasing managers; risk exposure, increasing the sensitivity of managerial pay and wealth to firm performance has some other negative effects."
Don't tell me the only thing that makes it false is the use of "while" vs. "besides," Because that is just ridiculous.
Because its all equity financed you have to use the unlevered cost of capital (pretax WACC) which is then = (20/25)*3%+(5/25)*2% = 2.8% so the answer is C.
alpha is the difference between the expected return and the realized return (found from CAPM). realized return is then = 2% + 1.386(5%) = 8.93%. Then, alpha = 9.5% - 8.93% = 0.57% (D)
The value of a levered firm is the value of the unlevered firm plus the present value of the interest tax shield. In the case of permanent debt is the corporate tax rate multiplied by the amount of debt. Calculation is: TUV value = (15/0.12)+(50*0,35) = 142.5 (B)
Because a strangle has a put and call with different strike prices there is a larger range where you would receive no positive payoff which would logically then be a cheaper combination than a straddle.
D/E = 0.2. Then D = 0.2E. Using the last formula on the first page on the formula sheet, we get E/1.2E (we replace D with 0.2E). That essentialy gives us 1/1.2 (or 10/12) when we cross out the E's.
Thanks to Jasper Bosman, I updated this file. "p41 you have there 0.086%, which should be 0.015%.". I just made a mistake filling out the covariance matrix
Financial Markets - Literature notes from CH10 to CH24
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