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A company has a single zero coupon bond outstanding which matures in 10 years with a market value of $25m. The current value of the company’s assets is $21m, and the standard deviation of the return on the firm’s assets is 47 percent per year. The risk free rate is 6 percent per year, compounded continuously. 1) Use the Black-Scholes model to determine the value of the company’s equity. {Hint: You may use the option calculator your team developed in this course. Clearly identify the parameters of the model. Certain parameters are keys to the problem and thus carry significantly higher weights than others.}(15 points) 2) The company has a new project available. The project has an NPV of $2.3m. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged. {Hint: Clearly identify and explain how you change the parameters of the model to account for the project’s NPV. This is the key to this question. The outcome of the model is garbage if this is wrong. In other words, you will be severely penalized if you are handling the NPV incorrectly in the model.} (15 points) 3) Does all of the project’s NPV accrue to shareholders? Why? Why not? Explain.
What are the portfolio's expected return and standard deviation, if 50% of the portfolio is in asset A?
Calculating Project Cash Flow from Assets In the previous problem,
Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. W..
Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $10 million, and production and sales will require an initial $4 million investment in net operating working capital. The company's tax rate is 30%. W..
A stock has had returns of −18.8 percent, 28.8 percent, 21.6 percent, −9.9 percent, 34.6 percent, and 26.8 percent over the last six years. What are the arithmetic and geometric returns for the stock?
The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 8% per year in the future. Shelby's common stock sells for $20.25 per share, its last dividend was $2.00, and the company will pay a dividend of $2.16 at the end o..
Using the formulas in the Appendix and the data in your company's latest financial statements, calculate the following measures of financial performance.
What is the addition to retained earnings?
The Houston Corp. needs to raise money for an addition to its plant. It will issue 300,000 shares of new common stock. The new shares will be priced at $60 per share with an 8.5% spread on the offer price. Registration costs will be $150,000. Present..
Vita-Juice is considering jumping on the pomegranate and acai bandwagon by producing Vita-Poma and Vita-Acai beverages in 2018 (t=1).
A firm has 10 million shares outstanding with a market price of $30 per share. The firm has $10 million in extra cash (short-term investments) that it plans to use in a stock repurchase; the firm has no other financial investments or any debt. What i..
Louise Manufacturing uses 2,600 switch assemblies per week and then reorders another 2,600. The relevant carrying cost per switch assembly is $10.50, and the fixed order cost is $1,300. What are the current carrying costs? Calculate the economic orde..
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