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(FINA323)[2006](f)final~2047^_10337.pdf
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Hong Kong University of Science and Technology
Finance 399J -L1&L2
Final Exam
Fall 2006
Professor Laura Xiaolei Liu
Section: Lecture _______________________________________
Student Name: _____________________________________________
Student ID Number: ___________________________________________
Instructions:
-This is a two hour exam with a total of 60 points.
-Do NOT open this exam paper until you are told to do so.
-This is a closed book examination. No draft paper or notes are allowed except for the
one page cheat sheet.
-Dont tear off any page of this exam paper except for the draft sheets.
-Honesty and integrity are most essential. You are committed as a student to the
universitys Academic Honor Code. Cheating will lead to serious consequences.
1. (10 points) Answer True (T) or False (F) for the following statements. Do not need to give explanations.
__F_____ a. High expansion value increases NPV and high abandonment value decreases NPV.
__F______ b. An efficient market implies that stock prices always reflect the underlying true value.
__F_____ c. Strong form of market efficiency implies that no investor will 'beat' the market in reasonably long time period, say 5 years.
___T_____ d. In an efficient market, a strategy of randomly diversifying across stocks or
indexing to the market, carrying little or no information cost and minimal
execution costs, would be superior to any other strategy.
__T______ e. American options always worth no less than comparable European options.
___F_____ f. When using valuation using multiples, we should pick the most comparable firm than using the average multiple of a group of firms.
__T______ g.The decision tree analysis will get the same value as the real option analysis if the underlying risk is totally diversifiable.
__F______ h. If a project has positive NPV, the firm should always invest immediately.
__T______ i. Two firms with the same risk on assets (operating side of the risk), the one with lower debt ratio will have lower return on equity.
__F______ j. Because diversification can reduce risk, firms should try to diversify by investing into more business lines.
2. (4 points) Two stocks, DRAM and IOM, with the following information: DRAM=9.60%, IOM=9.78%, DRAM,S&P= 0.253%, (covariance between DRAM and S&P is 0.253%) IOM,S&P =0.213%.
a. If you were to invest all your wealth in one stock, which would be riskier, DRAM or IOM? Why?
IOM. Because the return of IOM has higher standard deviation.
b. If most of your wealth were invested in the S&P 500, which would be riskier, a small investment in DRAM or a small investment in IOM? Why?
DRAM. Because DRAM has higher systemic risk (CAMP beta)
Beta_DRAM (0.253%/ S&P 2 ) > Beta_IOM (0.213%/ S&P 2)
3. (10 points) J&B Drilling Company is thinking about purchasing a lease to drill for natural gas in a remote region of southwest Louisiana and south