Reference no: EM131082839
Suppose that you have gathered the information from a financial broker who trades on Lusaka Stock exchange about the shares of Lafarge, which is the underlying asset for a futures contract with settlement six months from now. You know the following about this financial asset and futures contract:
1. In the spot cash market, Lafarge is selling its shares for $1000 per share.
2. Lafarge pays $120 per year in four quarterly payments of $30 per share, and the next quarterly payment is due exactly three months from now.
3. The current interest at which funds can be loaned is 10% per annum and the borrowing rate is 18% per annum.
4. The contract is for six months
Answer the below questions:
a. What is the theoretical (or equilibrium) futures price? Based on the lending rate? Based on the borrowing rate?
b. What action would you take if the futures price is $900? Clearly indicate the position as to the asset , the futures contract and the related financing decision. What is the profit from this action?
c. What action would you take if the futures price is $1,200? Clearly indicate the position as to the asset, the futures contract and the related financing decision. What the profit from this action?
d. If you know that you can reinvest any funds you received one month from now at 1% a month , what would the theoretical futures price for six month settlement be?
|
Part of the mortgage closing costs
: Mike purchased a sports shop for $186,000. His bank is willing to finance 75% of the purchase price. As part of the mortgage closing costs, Mike had to pay 3 1/4 discount points. How much did this amount to?
|
|
Shareholders are different from interest payments to lenders
: Dividend payments to shareholders are different from interest payments to lenders because: a. Dividend payments are more costly to a corporation b. The interest rate is lower than the cost of equity to corporations c. Interest payments, not dividends..
|
|
Probability of economy state of economy stock
: Rate of Return if State Occurs State of Probability of Economy State of Economy Stock A Stock B Stock C Boom 0.64 0.11 0.20 0.38 Bust 0.36 0.18 0.10 − 0.04 a. What is the expected return on an equally weighted portfolio of these three stocks?
|
|
Maximum initial cost of company would be willing to pay
: Och, Inc., is considering a project that will result in initial aftertax cash savings of $1.87 million at the end of the first year, and these savings will grow at a rate of 1 percent per year indefinitely. What is the maximum initial cost of company..
|
|
What is the theoretical futures price and borrowing rate
: Suppose that you have gathered the information from a financial broker who trades on Lusaka Stock exchange about the shares of Lafarge, which is the underlying asset for a futures contract with settlement six months from now. What is the theoretical ..
|
|
What is shadows cost of equity
: Shadow Corp. has no debt but can borrow at 7.6 percent. The firm’s WACC is currently 9.4 percent, and the tax rate is 35 percent. What is Shadow’s cost of equity? If the firm converts to 50 percent debt, what will its cost of equity be?
|
|
Short position in put option on common stock
: You have a short position in a put option on Apple Inc. common stock. The option has an exercise price of $136 and the stock is currently trading at $127. The option premium is $3.90 per contract. What is your net profit/loss if Apple Inc. stock pric..
|
|
Target capital structure-cost of common equity
: Percy Motors has a target capital structure of 30% debt and 70% common equity, with no preferred stock. The yield to maturity on the company's outstanding bonds is 10%, and its tax rate is 40%. Percy's CFO estimates that the company's WACC is 13.60%...
|
|
Ethical considerations-mitigate for the environmental impact
: A mining company is considering a new project. Because the mine has received a permit, the project would be legal; but it would cause significant harm to a nearby river. Calculate the NPV and IRR with mitigation. Under the assumption that all costs h..
|