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Suppose that the result of a major lawsuit affecting a company is due to be announced in the next few seconds. The company’s stock price is currently $500 per share. If the ruling is favorable to the company, the stock price per share is expected to jump to $650. If it is unfavorable, the stock is expected to drop to $300 per share. a. What is probability of a favorable ruling implied by the stock price and the two possible outcomes after the announcement? b. Assuming that the volatility of the company’s stock after the ruling will be 20% for six months if the ruling is favorable and 40% if it is unfavorable, calculate the prices of six-month European call options with strike prices of $500, and $600. Finally calculate the implied volatilities corresponding to these two option prices. Assume that the company does not pay dividends and that the six-month risk-free rate is 5% on a continuously compounded basis.
The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $25,100,000 be paid to the president upon the completion of her first 7 years of service. The company wants to set aside an eq..
Equipment is purchased for $1,500,000 (no salvage value). The company uses straight line depreciation for 9 years. Assume no other fixed assets. What is the accumulated depreciation at end end of year 4?
You have just taken over as a fund manager at a brokerage firm. Your assistant, Thomas, is briefing you on the current portfolio and states "We have too much of our portfolio in Alpha. Even if the probabilities for different states of economy (expans..
Given that the current stock price is $60 per share and the appropriate discount rate is 10 percent, what is this constant growth rate?
Calculate two EBIT–EPS coordinates for each of the structures by selecting any two EBIT values and finding their associated EPS values. Plot the two capital structures on a set of EBIT–EPS axes. Indicate over what EBIT range, if any, each structure i..
BUBBA SHRIMP, Inc. with current assets of $25,300, net fixed assets of $27,500, current liabilities of $14,300, and long-term debt of $12,000; calculate the following: What is the value of the shareholders' equity account for this firm?
XYZ has just sold a callable bond. The bond is a thirty year semi-annual bond with a coupon rate of 8%. Investors, however, can call the bond starting at the end of ten years. If the yield-to-call on this bond is 10% and the call requires XYZ to pay ..
Suppose that you want to create a "retirement party fund" for yourself and place $50 in a bank account for each of the next 20 years. If that account earns an annual rate of return of 7%, how much will be in your retirement party fund at the end of t..
Companies with relatively high assets to sales ratios require a relatively large amount of new assets for any given increase in sales: hence they have a greater need for external financing. there are currently no alternatives for these types of firms..
Hooper Printing Inc. has bonds outstanding with 19 years left to maturity. The bonds have an 7% annual coupon rate and were issued 1 year ago at their par value of $1,000. However, due to changes in interest rates, the bond's market price has fallen ..
The stock price for Ewing Corp. today is $30 and at date 1 will either go up by 5% or go down by 2%. When the one-period interest rate is 2%, calculate the price for the call option (underlying asset: Ewing Corp. stocks) matures at date 1 and has exe..
The Brocks now have two preschool-age children. Their household income has declined with Pam providing full-time care for the children. To compensate for their lower monthly income, Pam and Josh have cut back to spend money on basics only. What actio..
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