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  1. Sticky: Q 37 Ans C: The best way to approach these...

    Q 37 Ans C:

    The best way to approach these kind of problems in the exam is to take the middle value given in the answer as the OAS and arrive at the option value from the binomial model. If the...
  2. Sticky: Q 36 Ans B: Value of the bond at the upper...

    Q 36 Ans B:

    Value of the bond at the upper node after 1 year
    = (108 * 0.5 + 108 * 0.5)/1.068548 = 101.0717

    Since the bond can be put at $101.5, the bond price cant be below 101.5 in the...
  3. Sticky: Q34 Ans B: We can find out the value of the...

    Q34 Ans B:

    We can find out the value of the bond by discounting the
    future payoff. In case of interest rate model, both the nodes have 0.5
    probability of occurrence (unlike the stock binomial...
  4. Sticky: Q32 Ans C: This is similar to the previous...

    Q32 Ans C:

    This is similar to the previous question, here we need to find out the present value factor for the rates which are after 90 days, 270 days and 450 days.

    PV of rate after 90 days =...
  5. Sticky: Q 31 Ans C: We will arrive at the present...

    Q 31 Ans C:

    We will arrive at the present value factors for the rates in the exhibit 1.

    PV for 180 days = Z1 = $1/ (1 + 4.5% * 180/360) = 0.9780

    Similarly, we will arrive at the other...
  6. Sticky: Ans 30 C: Since the interest rates have...

    Ans 30 C:

    Since the interest rates have changed (increased) the FRA would become more valuable to Swamp now. The best way to find out the value of the FRA is to determine the New FRA rate and...
  7. Sticky: Q28 Ans B: This takeover defense strategy is...

    Q28 Ans B:
    This takeover defense strategy is known as Pac man defense.



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    Today's Question (Questions...
  8. Sticky: Q26. Ans B: Let’s evaluate the proposed deal...

    Q26. Ans B:

    Let’s evaluate the proposed deal by Mr. Bhushan
    Cash value = $500 million
    No of shares to be issued = $50 million / 8 = 6.25 million
    Value of Vizag steel after acquisition = ($3000...
  9. Sticky: Q25 Ans B: Since the synergy value is $100...

    Q25 Ans B:

    Since the synergy value is $100 million, it will be distributed to Salem’s shareholders and Vizag’s shareholders.

    Value of Vizag before acquisition = 30 * 100 = $3000 million
    Value...
  10. Sticky: Q24 Ans B: To value the same, following are...

    Q24 Ans B:

    To value the same, following are the steps.
    1. We should come up with the P/E, P/S and P/B ratio on the acquisition price.
    2. Take the average of P/E, P/S and P/B of all the 3...
  11. Sticky: Q23 Ans A: From the table below we can work...

    Q23 Ans A:

    From the table below we can work out the premium paid, take the average of the premium paid and apply that on the current stock price of Salem.

    Company------------Stock price...
  12. Sticky: Q22 Ans B: Using the comparable approach, we...

    Q22 Ans B:

    Using the comparable approach, we need to come up with the P/E, P/S and P/B ratio of the comparables. Once we have these ratios we have to find out the average and then get the value...
  13. Sticky: Q21 Ans A: First compute the terminal cash...

    Q21 Ans A:

    First compute the terminal cash flow
    Cash flow terminal = $35 * (1.07) / (0.12-0.07) = $749 million
    CF1 = $20 million, CF2 = $30 million, CF3 = $35 + $749 = $782 million
    Plug the...
  14. Sticky: Q19 Ans: B We need to find out the residual...

    Q19 Ans: B

    We need to find out the residual income and book values

    Item-------------------------20X1--------------------20X2----------------20X3
    Beginning...
  15. Sticky: Q18 Ans B: The terminal value will be 1.3...

    Q18 Ans B:

    The terminal value will be 1.3 times the ending book value in year 20X3 as Karan has estimated that the stock will trade at a P/B ratio of 1.3.
    Ending book value = $28.535 (See the...
  16. Sticky: Q17 Ans A: See the following table to...

    Q17 Ans A:

    See the following table to understand the calculation
    EPS = ROE(t) * BV(t-1)
    Equity Charge = Cost of Equity * BV(t-1)
    Ending Book Value = Beg Book value + EPS - Dividend

    ...
  17. Sticky: Q16 Ans B: Presence of operating leases...

    Q16 Ans B:

    Presence of operating leases effect both earnings as well as the book value and hence its impact is the most.
    LIFO method reports correct COGS, but reported book value is lower, there...
  18. Sticky: Q15 Ans A: We will be using the single stage...

    Q15 Ans A:

    We will be using the single stage formula and replace our valuation with the market price and the find out the growth rate

    Price = B0 + (ROE – r)/(r-g) * B0
    60 = 23.4 + {(0.13 –...
  19. Sticky: Q14 Ans C: Like the previous case here also...

    Q14 Ans C:

    Like the previous case here also we need to find out the beginning book value, which turns out to be $23.4.
    The sustainable growth rate = ROE * RR = 13 % * 0.4 = 5.2%

    Value = B0 +...
  20. Sticky: Q12 Ans A: Since the goodwill is overstated,...

    Q12 Ans A:

    Since the goodwill is overstated, the resulting book value is overstated, since we have used book value in our valuation, the valuation is overstated.

    ...
  21. Sticky: Q11 Ans A: F value = MSR/MSE => 2000/71 =...

    Q11 Ans A:

    F value = MSR/MSE => 2000/71 = 28.17

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  22. Sticky: Q10 Ans C: Here we are asked to find out Mean...

    Q10 Ans C:

    Here we are asked to find out Mean squared Error
    MSE = SSE / (n-k-1) = 1000/14 = 71

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  23. Sticky: Q9 Ans A: The Mean square value for...

    Q9 Ans A:

    The Mean square value for regression is
    MSR = SSR/K = 6000/3 = 2000

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  24. Sticky: Q8 Ans B: The degree of freedom for residual...

    Q8 Ans B:

    The degree of freedom for residual item in the ANOVA table is equal to n-k-1,
    where n is the number of observation
    k is the number of independent variables
    For the total item...
  25. Sticky: Q7 Ans A: The degree of freedom for...

    Q7 Ans A:

    The degree of freedom for regression item in the ANOVA table is equal to the number of independent variables (represented as K). Here it will be equal to 3.
    ...
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