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River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $220,000 of debt at an interest rate of 12% and use the proceeds to repurchase 22,000 shares at $10 per share. Profits before interest are expected to be $122,000.
a. What is the ratio of price to expected earnings for River Cruises before it borrows the $220,000? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b. What is the ratio after it borrows? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Tracy Chapman is saving to buy house in five years. She plans to put 20 percent down at that time and she believes that she will need $28,000 for down payment.
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Three put options on a stock have the same expiration date and strike prices of $55, $60, and $65. The option prices are $3, $8, and $12, respectively. How should an arbitrager take advantage of the arbitrage opportunity if it exists? (Hint: Examine ..
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