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The common stock of Sternco is currently trading at $40 per share. Sternco is currently “in play” as a take-over target and is not expected to pay any dividends for the next 6 months. You believe that if management is successful at repelling all offers, the stock price will fall significantly, but if they are unsuccessful, the stock price will rise significantly. You want to profit from either outcome. The risk-free rate is 10% and a 6-month put option with an exercise price of $40 is selling at $4. A dealer offers you a 6-month European call option with an exercise price of $40. The fair price option is $2.05.
a. Propose a strategy to take advantage of your beliefs that uses the above mentioned put and call options. That is the strategy that allows you to profit from both: the significant price increase and decrease. Your answer should include the payoff table and graph. GRAPH IS NECESSARY TO ANSWER.
Assume that the returns from an asset are normally distributed. The average annual return for this asset over a specific period was 17.1 percent and the standard deviation of those returns in this period was 43.8 percent. What about triple in value?
We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, −.2. If the interest rate on Treasury bills is 4% and..
Joe was trying to decide which scheduling format to employ for his planning: AON or AOA. What are some of the issues that Joe should first consider prior to choosing between these methods?
Efficient portfolio theory. What is the meaning of “efficient portfolio” as described by the Modern Portfolio Theory? What type of risk cannot be diversified, a
Brown, the owner of Julie’s Party Sandwiches, has delegated management of the business to Stacise Wood, a friend. Brown drops by to meet customers and check up on cash receipts, but Wood buys the merchandise and handles cash payments. In each instanc..
Fama’s Llamas has a weighted average cost of capital of 9.3 percent. The company’s cost of equity is 13 percent, and its pretax cost of debt is 7.3 percent. The tax rate is 40 percent. What is the company's debt-equity ratio?
Abbott Lab made $2.80 net income per share last year and paid out $1.30 in dividend. The company had a book value (or equity) per share of $20. The market has a risk free rate of 3.1% and market return 11.1%. What’s the discount rate using CAPM? Ca..
The first time you save a document, which dialog box appears? Which automatic feature in Word automatically corrects typos, minor spelling errors, and capitalization as you type? What happens when you click the Zoom level button? Which button is not ..
A proposed new investment has projected sales of $833,000. Variable costs are 54 percent of sales, and fixed costs are $187,280; depreciation is $95,000. Assume a tax rate of 40 percent. What is the projected net income?
Individual or component costs of capital) Compute the cost of capital for the firm for the following: A bond that has a $1,000 par value (face value) and a contract or coupon interest rate of 10.8 percent. Interest payments are $54.00 and are paid se..
Home Place Hotels, Inc., is entering into a 3-year remodeling and expansion project. The construction will have a limiting effect on earnings during that time, but when it is complete, it should allow the company to enjoy much improved growth in earn..
Evening Story Corporation has sales of $4,732,270; income tax of $558,166; the selling, general and administrative expenses of $264,444; depreciation of $328,532; cost of goods sold of $2,840,400; and interest expense of $153,129. Calculate the amoun..
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