What is the value of the portfolio in one year

Assignment Help Financial Management
Reference no: EM131304697

Madeline Manufacturing Inc.’s current stock price is $40 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $30. These options will expire at the end of 1 year, at which time Madeline’s stock will be selling at one of two prices $25 or $45. The risk-free rate is 6%. Using the binomial option pricing model, create a riskless hedged investment and answer the following question:

After the payoffs have been equalized and the riskless hedged investment is created, what is the value of the portfolio in one year? Round your answer to two decimals if needed.

Reference no: EM131304697

Questions Cloud

Is michael entitled to discharge of debt : Michael and Dianne Shankle divorced. An Arkansas state court ordered Michael to pay Dianne alimony and child support, as well as half of the $184,000 in their investment accounts. Is Michael entitled to a discharge of this debt, or does it qualify as..
Company uses the npv method when choosing projects : Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV me..
The analysis of a capital budgeting project : Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project? Changes in net working capital. Shipping and installation costs.
Assume a project has normal cash flows : Assume a project has normal cash flows. A project’s IRR increases as the WACC declines. A project’s NPV increases as the WACC declines. A project’s MIRR is unaffected by changes in the WACC.
What is the value of the portfolio in one year : Madeline Manufacturing Inc.’s current stock price is $40 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $30. After the payoffs have been equalized and the riskless hedged investment i..
Payoffs have been equalized-riskless hedged investments : Madeline Manufacturing Inc.’s current stock price is $40 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $30. After the payoffs have been equalized and the riskless hedged investment i..
Discuss issues in executive compensation : Discuss issues in Executive compensation (why are they paid more - what is the justification, what are some of the morale issues surrounding exec compensation among employees, what's really fair in terms of exec comp, how can exec comp packages be co..
Consists of common stock-preferred stock and debt : Schalheim Sisters Inc. has always paid out all of its earnings as dividends; hence, the firm has no retained earnings.This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, and its target ..
Project being evaluated is riskier than an average project : Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is evaluating a project with an expected return of 14%, before any risk adjustment. The risk-free rate is 5%, and the market risk premium is 4%. The project being ..

Reviews

Write a Review

Financial Management Questions & Answers

  Taxpayer to take the next required minimum distribution

If a taxpayer delays their first required minimum distribution from a traditional IRA until April 1 of the year after they reach age 70½, what is the deadline for the taxpayer to take the next required minimum distribution?

  Identify some common miscellaneous itemized deductions

Identify some common miscellaneous itemized deductions and identify any limitations that are imposed on the deductibility of these items.

  When would you employ this strategy

A trader buys two call options and two put options. When does the trader make a profit? When would you employ this strategy?

  Systematic risk increases-factors remaining constant

IBM’s stock is currently selling at $ 11.44. This year the firm had earnings per share of $2.80 and the current dividend is $ 0.68. Earnings are expected to grow 7% a year in the foreseeable future. The risk free rate is 10 percent and the expected m..

  After-tax cash flow for firm using income statement

To calculate the after-tax cash flow for a firm using an Income Statement, you would ______.

  Ongoing profitable operations

Mustaine Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $279,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is expected to have no resale value after the seven year..

  What is the geometric average return for four-year period

Over the last four years, the common stock of Plymouth Shippers has had an arithmetic average return of 9.3 percent. Three of those four years produced returns of 14.1 percent, 15.6 percent, and 3.4 percent, respectively. What is the geometric averag..

  What will be effect of overstating the beginning inventory

Alpha Company's beginning inventory should have been $85,000, but instead, the bookkeeper listed it as $95,000. The manager told the bookkeeper not to "worry" about the mistake, because it would resolve itself in the following year. What will be the ..

  What is the real after tax return

The nominal interest rate is 6 percent, expected infl ation is 3 percent, and the tax rate is 20 percent. What is the real after- tax return?

  What is the rate of return on total invested-retirement plan

A publicly traded consulting engineering firm has a retirement plan wherein the company will match an employee’s stock purchases up to $ 5,000 per year, provided the employee has been with the firm for at least 10 years. If an employee hired 10 years..

  Health care benefits are excluded from taxation

Under current US law, employer-provided health care benefits are excluded from taxation. Use an indifference curve analysis to model the impact of eliminating the exclusion upon the amount of health care benefits. (Hint: Think of an individual as con..

  What is the combined present value of these cash flows

You are scheduled to receive a $480 cash flow in one year, a $780 cash flow in two years, and pay a $380 payment in three years. If interest rates are 9 percent per year, what is the combined present value of these cash flows?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd