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Nancy holds an option to purchase a plot of land which will expire in one year. The option gives Nancy or anyone else holding the option the right to buy the plot of land for $1 million. The interest rate is zero. The price of condominium apartments is $500,000 and everyone believes correctly that the price of apartments will not change over the next five years. If Nancy exercises the option now she can build under current zoning any developer could build a condominium apartment building with 20 apartments at a cost of $8 million. . Zoning changes are under consideration. The plot will be either “upzoned” or “downzoned” . . If the plot is “upzoned” a 40 apartment building will be legal and would cost any developer $16 million to build. If the plot is “downzoned” no more than 2 apartments worth $500,000 can be built on the plot at a building cost of $1.5 million. The zoning board’s decision will be known in six months All the other developers believe that the chance of upzoning is equal to the chance of downzoning. i) What is Nancy’s option to purchase the land worth now? ii) Nancy’s reading of the news convinces her that the chance of an upzoning is only 10% and the risk of a downzoning is 90%. Other developers reading the same news do not agree with her. What should she do?
Assume that you contribute $230 per month to a retirement plan for 20 years Then you are able to increase the contribution to $460 per month for another 30 years. Given a 7 percent interest rate, what is the value of your retirement plan after the 50..
A company is expected to pay a dividend of $1.50 per share next year. The dividends are expected to grow at 2.5% per year indefinitely. If the required return on similar investments is 5%, what is the current price of the stock?
Dave bought a rental property for $200,000 cash. One year later, he sold it for $240,000. What was the return on his $200,000 investment? Suppose Dave invested only $20,000 of his own money and borrowed $180,000 (interest free from his rich father). ..
The Wildcat Oil Company is trying to decide whether to lease or buy a new computer-assisted drilling system for its oil exploration business. Management has decided that it must use the system to stay competitive; it will provide $2.1 million in annu..
An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data: Using the Black-Scholes model, what is the value of the put option?
Tea&Juices, a foreign producer of soft drinks, is considering expanding its activities to Canada. To evaluate the profitability of the business, the management has decided to use as benchmarks two other foreign producers of soft drinks who have alrea..
What is the contract size of one futures contract (in barrels per contract)? - How many futures contracts do you need to purchase to hedge your position?
Suppose you know a company's stock currently sells for $70 per share and the required return on the stock is 16 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's th..
Three general unsecured creditors are owed $45,000 as follows: Easy Does It Rentals, $15,000; Make Me a Deal Furniture, $5,000; and TV’s r Us, $25,000. After all other creditors are paid, the amount left for distribution to general unsecured creditor..
Calculate the duration of a common stock that pays dividends at the end of each year into a perpetuity. Assume that the dividend increases by 2% each year and that the effective rate of interest is 5%.
Suppose you bought a bond with a coupon rate of 7.8 percent one year ago for $901. The bond sells for $934 today. Assuming a $1,000 face value, what was your total dollar return on this investment over the past year? What was your total nominal rate ..
You’ve observed the following returns on Barnett Corporation’s stock over the past five years: –26.7 percent, 14.8 percent, 32.6 percent, 2.9 percent, and 21.9 percent. What was the arithmetic average return on the stock over this five-year period? W..
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