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Suppose some stock currently selling for $80 will either increase in value over the next year to $100, or decrease in value to $64. The risk free rate over the period is 10% given annual compounding. [Let r denote the continuously compounded rate per year. Thus e r×1 = 1.1.] A call option on the stock with an exercise price of $75 matures in one period (1 year).
(a) What are u and d?
(b) What are the payoffs from the call in each state of the world?
(c) What position in the underlying stock and bonds would allow you to replicate the payoff from the call? What is the cost of this replicating portfolio? What is the the call price at time 0?
Xeroz issed bonds that pay $77.50 in interest each year and will maturein 9 years. You are thinking about purchasing the bonds. You have decided that you would need to recieve a return of 7 percent on your investmeny. What is the value of the bond to..
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Mullineaux Corporation has a target capital structure of 62 percent common stock, 7 percent preferred stock, and 31 percent debt. Its cost of equity is 13.2 percent, the cost of preferred stock is 6.2 percent, and the cost of debt is 7.9 percent. Wha..
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Niendorf Corporation's 5-year bonds yield 9.50%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for..
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Construct a three- step binomial tree to calculate a price for a 3-month put option on an asset at a strike of 101. The current price is 100. At each step, the price either rises of falls by a factor of 2% (that is, either multiplied by 1.02 or divid..
On January 1, 2015, XXX Corporation acquired equipment for $260,000. The estimated life of the equipment is 5 years or 40,000 hours. The estimated salvage value is $20,000. If XXX Corporation uses the units of production method of depreciation, what ..
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