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Suppose that Bigco is currently trading for $100 per share. We are offered a European call option to purchase one share with an expiration date in one year. We know that on the expiration date Bigco stock will sell for either $120 per share (a “good day”: probability = 80%) or for $80 per share (a “bad day”: probability = 20%). No other prices are possible. The stock will not pay any dividends during the year. The riskless interest rate is zero, so a bond can be purchased (or sold) for a face value of $100 and has a certain payoff of $100 in one year. Stocks, bonds, and options can all be bought or sold, long and short, without any transactions costs.
What is call premium (value of call) with strike price of $100?
A Treasury bill has a bid yield of 2.91% and an ask yield of 2.89%. The bill matures in 126 days. Assume a face value of $1,000. What is the least you could pay to acquire a bill?
A company is planning an IPO of 10 million shares. Each share is expected to sell at $10 per share. The investment banker will charge an 8% spread and incur expenses of $500,000. How much will the company receive if all shares sell at the expected pr..
Do you think it is appropriate to have a different rate for Capital Gains, that is lower than the tax rate for ordinary income? Why or why not?
Cameron Industries is purchasing a new chemical vapor depositor in order to make silicon chips. It will cost $6 million to buy the machine and $10,000 to have it delivered and installed. The machine is expected to have a working life of six years. Sa..
You own 2,200 shares of stock in Avondale Corporation. You will receive a $1.60 per share dividend in one year. In two years, Avondale will pay a liquidating dividend of $60 per share. The required return on Avondale stock is 20 percent. Suppose you ..
The _____ is the time period that elapses from the point when the firm uses the raw materials in manufacturing a finished good to the point when the finished good is sold. In the EOQ model, if carrying costs increase while all other costs remain unch..
Application of time value of money principles can help you make decisions on loan alternatives. This exercise requires you to compare three mortgage alternatives using various combinations and points. Points on a mortgage refer to a payment that is m..
Conflicts between two mutually exclusive projects with greatly differing cash flow timing where the NPV method chooses one project but the IRR method chooses the other:
Interest rates are rising. Explain how this would impact a negatively interest-rate spread financial institution.
Lycan, Inc., has 6 percent coupon bonds on the market that have 9 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 8 percent, what is the current bond price?
What is one advantage and one disadvantage of using currency options over futures to hedge exchange rate risk?
Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% o..
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