Reference no: EM132538203

Question a. Two years ago your firm took out a 30- year amortizing loan to purchase a small office building. The loan has a 4.80% APR with monthly payments of $2623.33.

i. How much do you owe on the loan today?

ii. How much interest did the firm pay on the loan in the past year?

iii. Suppose starting next year (fourth year) the loan rate jumps to 7.2% APR. What is the remaining balance? What will be the monthly payment?

Question b. The current price of Pineapple stock is $50. In each of the next two years, this stock price can either go up by $12 or go down by $7. The stock pays no dividends. The oneyear risk-free interest rate is 5% and will remain constant.

i. Using the Binomial Model, calculate the price of a two-year put option on Pineapple stock with a strike price of $50.

ii. Using the Binomial Model, calculate the price of a two-year call option on Pineapple stock with a strike price of $51.

Question c. Superwoman Corp just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, Superwoman's dividends were expected to grow at a 3% rate, and its share price was $50. With the new expansion, Superwoman's dividends are expected to grow at a 5% rate.

i. What share price would you expect after the announcement? (Assume Superwoman's risk is unchanged by the new expansion.

ii. Is the expansion a positive NPV investment?

iii. How would a change in risk affect your answer?