# May 2011,SFM Solution

shaishav soni (CA final)     30 June 2011

##### shaishav soni
CA final
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Here is SFM May 2011 solution asked by someone,i also find it earlier on Caclubindia.find attachment.

Attached File : 559642 754532 30161 717095 ca final sfm may 11.pdf downloaded: 152 times CCI Online Learning shailaja samant (Manager)     05 July 2011

##### shailaja samant
Manager
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I differ on solution given in the attachment for question 1(a) & (b). According to me answer should be :

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%

3 Month        Value of Call         Expected

@ E =450             Vc P = 0.285          St =500           50                   14.25=50 X  0.285

 So =420 1-P = 0.715

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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