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A tree is constructed to value an option on an index which is currently worth 100 and has a volatility of 25%. The index provides a dividend yield of 2%. Another tree is constructed to value an option on a non-dividend-paying stock which is currently worth 100 and has a volatility of 25%. a) Calculate the parameters u and p for both the index and the stock. Are the paremeters u and p same for both index and the stock? Give reasons for yes or no. b) Calculate the option price on the index by using the risk neutral probability approach. Show the labelled tree.
A financial institution is considering a loan application for $2 million. It expects to charge 1/5 % origination fee and 10 basis points as service fee. The institution has estimated a risk premium to be around 0.25%. The market interest rate for sim..
In each of the given fictitious examples, tell whether the money multiplier will increase, decrease, or stay the same.
You have $102,000 to invest in a portfolio containing Stock X, Stock Y, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 11 percent and that has only 80 percent of the risk of..
Which of the following is a limitation of the “percent of sales method” of preparing pro forma financial statements?
Does Advanced Micro Devices Inc. (AMD) capital structure differ from their industry average? Why or why not? (Industry averages should be taken from Bloomberg). Propose a change to their existing capital structure that you believe will benefit the fi..
KADS, Inc., has spent $460,000 on research to develop a new computer game. The firm is planning to spend $260,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; What will the ..
A stock sells for $12.36 a share and has a required return of 9 percent. Dividends are paid annually and increase at a constant 3 percent per year. What is the amount of the last dividend paid?
Suppose your company imports computer motherboards from Singapore. The exchange rate is currently 1.5136 S$/US$. You have just placed an order for 37,000 motherboards at a cost to you of 231.10 Singapore dollars each. Calculate your profit if the exc..
DW Co. stock has an annual return mean and standard deviation of 14 percent and 35 percent, respectively. What is the smallest expected loss in the coming year with a probability of 16 percent?
You are planning to save for retirement over the next 30 years.- How much can you withdraw each month from your account assuming a 25-year withdrawal period?
A corporate bond is quoted at a current price of 102.767. What is the market price of a bond with a $1,000 face value? Your firm offers a 10-year, zero coupon bond. The yield to maturity is 7%. What is the current market price of a $1,000 face value ..
Discuss three potential flows with the regular payback method. Discuss whether or not the discounted payback method corrects all three flaws.
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