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Assume an asset price St follows the geometric Brownian motion, dSt = µStdt + σStdWt, where µ and σ are constants and r is the risk-free rate.
1. Using the Ito's Lemma find the stochastic differential equation satisfied by the process Xt = Stn , where n is a constant.
2. Compute E[Xt] and Var[Xt].
3. Using the Ito's Lemma find the stochastic differential equation satisfied by the process Yt = Stert .
A large firm received a loan guarantee from the government. Due to the guarantee, the firm can borrow $50 million for five years at 8% interest rate per year instead of 10% per year. Calculate the value of the guarantee to the firm.
Corporate Fund started the year with a net asset value of $12.50. By year-end, its NAV equaled $12.10. The fund paid year-end distributions of income and capital gains of $1.50. What is the rate of return to an investor in the fund?
a preferred stock pays a 7 dividend and the required rate of return that investors have for this sotck is 9. given
The firm has a tax rate of 30 percent, an opportunity cost of capital of 12 percent, and it expects net working capital to increase by $57,000 at the beginning of the project. What will be the net cash flow for year one of this project?
the fact that she is providing no collateral, the bank is going to charge her a fee of 2.0% of her loan amount as well as take out the interest upfront. The bank is offering her 16% APR for six months.
For each of these transactions, explain when and how a hidden reserve is created. For each of these transactions, explain when and how a hidden reserve is drawn down to boost earnings.
the beta coefficient of an asset can be expressed as a function of the assets correlation with the market as follows
time warner shares have a market capitalization of 55billion. the company just paid a dividend of 35cents per share and
a bond for the webster corporation has the following characteristicsmaturity-12 yearscoupon-10yield to
You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit..
What is the value of a share of preferred stock that pays a $4.50 dividend, assume k is 10%.
What are the advantages and disadvantages of issuing both types of shares? Which type of shares would you decide to issue and why? What affect would the new issuance have on the financial statements?
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