1. You manage a $230 million equity portfolio. You expect that there is a reasonably high probability that the market will face 20 percent correction in the next 6 months. How might you hedge this risk? Give explicit purchase/sale instructions.
2. Suppose the spot price of the £ is $0.82. The 1-year futures price is $0.94. What does this say about the relative interest rates in the U.S. and British markets?
3. Firm X has a proposed project that will generate sales of 2,750 units at a selling price of $36 each. The fixed costs are $18,000 and the variable costs per unit are $21. The project requires $36,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the 5-year life of the project. The salvage value of the fixed assets is $8,400 and the tax rate is 34 percent. What is the operating cash flow for year 5?
A. $15,345
B. $17,793
C. $16,408
D. $19,929
4. Suppose Exxon Mobil [XOM] has a sustainable growth rate. The payout ratio for XOM is 40%. For 2016 XOM’s net income is $3B and equity is $15B. What is the sustainable growth rate of XOM during this period?
a. 10%
b. 12%
c. 14%
d. 16%