Here is SFM May 2011 solution asked by someone,i also find it earlier on Caclubindia.find attachment.
1 Replies
shailaja samant
(Manager)
(62 Points)
Replied 05 July 2011
Reply from prof NK Jain:
I differ on solution given in the attachment for question 1(a) & (b). According to me answer should be :
Answer 1 (a)
Return of the share E (R) as under
E (Rf ) = Rf +B1F1+B2F2+……..+BnFn
Where B1 is firm j’s factor -1 Beta
F1 is surprise in factor-1 and so on……….
E (Rf ) = 9.25+1.2(7.70-7.70) +1.75(7-5.50)+1.3(9-0.75)+1.70(12-10)+1(7.50-7)
E (Rf ) =9.25+0+2.625+1.624+3.4+0.50
E (Rf ) = 17.40%
Answer 1 (b)
|
3 Month Value of Call Expected @ E =450 Vc
St = 400 0 0 = (0X0.715) Expected Vc = 14.25 |
Expected share price at 32 month
E(st) = 500 p + 400 (1- p)
As per risk –neutral method,
E (st) = Future value of So= 420
So, 500 p + 400 (1- p) = 420 X e0.02
or, 500 p + 400 - 400p = 420 X 1.0202 = 428.484
or, 100 p = 28.484
or, p = 0.285
1- p = 0.715
Expected Vc = 50 X 0.285 + 0 X 0.715 = 14.25
Co= pv of call = 14.25 X e -0.08X3/12
= 14.25/1.0202
=13.97
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