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Consider an American call option on a stock. The stock price is $50, the time to maturity is 15 months, the risk-free rate of interest is 8% per annum, the exercise price is $55, and the volatility is 25%.
Dividends of $1.50 are expected in 4 months and 10 months. Show that it can never be optimal to exercise the option on either of the two dividend dates. Calculate the price of the option.
A company pays a constant $20 dividend on its stock. The company will maintain this dividend for the next 15 years and will then cease paying dividends forever. What is the current price per share if the required return on this stock is 11 percent? S..
Howell Corporation produces an executive jet for which it currently manufactures a fuel valve; the cost of the valve is indicated below: Cost per Unit Variable costs Direct material $940 Direct labor 600 Variable overhead 300 Fixed costs Depreciation..
Lawyers are changing their pay structures. It used to be that they would bill hourly (top dollar for top lawyers, less experienced helpers had cheaper rates). Now they’re beginning to price like consultants—per project. What advice would you give a l..
Cole Corporation operates three investment centers. The following financial statements apply to the investment center named Morrison Division. Cole has a desired ROI of 10 percent. Headquarters has $96,000 of funds to assign to its investment centers..
The Graber Corporation’s common stock has a beta of 1.3. If the risk-free rate is 5.3 percent and the expected return on the market is 11 percent, what is the company’s cost of equity capital?
Future Values. Compute the future value of a $100 cash flow for the following combinations of rates and times.
Please also explain how the financial decisions regarding this capital budgeting project are related to management, marketing or operations decisions that the company must make (or has made) in light of the plans to open the new line of stores, i.e.,..
You find that the bid and ask prices for a stock are $14.25 and $15.45, respectively. If you purchase or sell the stock, you must pay a flat commission of $30. If you buy 100 shares of the stock and immediately sell them, what is your total implied a..
Which of the following is an appropriate goal of the firm?
Depreciation (of existing machinery): $10,000. Calculate the relevant cash flow for this firm for the year 2014.
What is meant by the term “self-supporting growth rate”? How is this rate related to the AFN equation, and how can that equation be used to calculate the self-supporting growth rate?
What individual’s decision is altered as a result of not taxing the imputed rent earned by those who live in their own house? How so? Explain.
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