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A stock price is currently priced at $25. In 1 year its price will either be $26 or $30. The risk-free rate is 5% per annum with continuous compounding. (a) Suppose the stock pays a continuous dividend yield of 3% per annum. Construct an arbitrage opportunity. (b) Suppose the stock pays a continuous dividend yield of 1% per annum. In this case there is no arbitrage opportunity. So go ahead and price a 1-year at-the-money European call option on the stock.
In December 1995 Boise Cascade’s stock had a beta of 0.95. The Treasury bill rate at the time was 5.8% and the Treasury bond rate was 6.4%. Assume the term structure of interest gives a 200 bp (basis point – a basis point is 1/100 of a %) spread bet..
Which element should NOT be taken into account when determining the net present value of a series of cash flows?:
A bond has 5 years to maturity and has a YTM of 8%. Its par value is $1,000. Its semi annual coupons are $50. What is the bonds current market price?
Tom's Company are expected to grow at an annual rate of 14% over the next 5 years and then slow to a constant rate of 10% per year. Tom's currently pays a dividend of $0.36 per share. What is the value of Tom's stock to an investor who requires a 16%..
The X company is considering the acquisition of a new processor that has an estimated installed cost of $57,000. The processor has an expected life of 5 years and will be depreciated over a 5 year ACRS life to a zero salvage value. Evaluate the purch..
Joe has a son and a wife. His wife is not the mother of his son. He wants to write his will so that they will be treated equitably. The son is currently 10 years old. In his will, Joe provides that $100,000 will be used to invest at the then-current ..
KADS, Inc., has spent $400,000 on research to develop a new computer game. The firm is planning to spend $200,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated;
Develop 3 proposals for your development strategy, which include outsourcing (buy), insourcing (make), or a combination of both. Present the pros and cons or benefit analysis for each of the 3 proposals
Drogo, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 10 years to maturity that is quoted at 108 percent of face value. The issue makes semiannual payments and has an embedded cost of 9 percent annually. Wha..
An elevator company produces elevator rails. To meet specifications, an elevator rail must be between 0.995 inches and 1.005 inches in diameter. Suppose that the diameter of an elevator rail follows a normal random variable with mean of 1 inch and st..
Suppose Auburn plans to pay Coach Malzahn a perpetuity if he wins a National Championship this season. The payment will be $37,000 each year for the rest of his life. Assume a 6% real interest rate. What is the present value of the perpetuity?
An ordinary annuity has an interest rate of 10% and a future value of 80.00. What would be the future value of this same annuity, if it were an annuity due instead of a regular annuity? The future value of this annuity due is $
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