Question 5 Consider a stock that is trading at $100 a share. The annual…
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Question 5 Consider a stock that is trading at $100 a share. The annual volatility of the stock is 20 percent, and the 3-month nominal risk-free interest rate is 8 percent. (a) Find the value of a 3-month European call option on the stock with an exercise or strike price equal to $100. (b) Find the value of a 3-month European put option with an exercise price equal to $95. (c) Consider a derivative security that pays, in three months, the square of the stock price that will prevail in 3 months. In other words, this security will pay where denotes the stock price in 3 months. Find the value of this derivative security today.
Your firm is purchasing a specialized machine that improves the efficiency. The machine costs $491,000. With this machine the firm
Your firm is purchasing a specialized machine that improves the efficiency. The machine costs $491,000. With this machine the firm expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment in this machine?
You work for TeamCo. and you have been assigned the task to evaluate a new project that requires an initial
You work for TeamCo. and you have been assigned the task to evaluate a new project that requires an initial investment of $93,700, has a life of 8 years, and equal annual cash inflows. The required return is 9.5 percent. According to the profitability index decision rule, what is the minimum annual cash flow necessary to accept the project?
Which of the following statements can be justified only by the Pecking order theory but not by the Static theory
Which of the following statements can be justified only by the Pecking order theory but not by the Static theory of capital structure? A) If an all-equity firm needs to raise external capital it is likely to prefer debt over equityB) Firms that regularly generate high profits often have low levels of debt in their capital structureC) Firms that have a high business risk and low tangibility of assets typically have lower debt in their capital structureD) Firms tend to issue debt when the interest rates are low and avoid issuing debt when the interest rates are h
Digital Copiers are opening up a new store and are in need of new copying machine. They are evaluting two
Finance Assignment Writing ServiceDigital Copiers are opening up a new store and are in need of new copying machine. They are evaluting two models and need to choose one. Xerox WorkCentre copier cost $305 to purchase, result in electricity bills of $151 per year, and last for 5 years. Epson EcoTank copier cost $505, result in electricity bills of $102 per year, and last for 8 years. The discount rate is 20%. a. What is the equivalent annual cost of the Epson EcoTank model? (Do not round intermediate calculations. Round your answers to 2 decimal places.)b. Which model is more cost-effective? Xerox WorkCenterEpson EcoTank
If I am 42 years old and hope to retire at 72, I have 30 years until retirement. Based on
If I am 42 years old and hope to retire at 72, I have 30 years until retirement. Based on how I want to live in retirement, I would need to draw $100,000 from this account each year. At 3.9% APR I would need to contribute $3,762.23 a month. Constant APR is 3.9% for $100,000 in interest each year, my retirement account balance must be 100,000/0.039 = $2564102.56My monthly deposit should be 2564102.56 x 0.039/12 / [1 (0.039/12)] 12×30 -1 = $3,762.23 a month correct?1. With the savings plan above, the monthly payments might be difficult to maintain or to pay at all. Suppose you decide to wait 5 more years until you retire. This will impact how much you will need at your retirement age, since you will be in retirement for 5 years less. What are your monthly payments with this plan?2. Suppose you can find a retirement account that earns interest at 4.5% interestinstead. How does that change your monthly payments? (You choose how long untilyou retire in this question.)3. State your conclusions and interpretations of these calculations.
Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for $4 per share.Preferred stock ………………………………..$
Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for $4 per share.Preferred stock ………………………………..$ 100,000Common stock (400,000 shares at $1 par) ………400,000Paid-in capital in excess of par …………………200,000Retained earnings ………………………………320,000Total stockholders’ equity …………………..$1,020,000a. Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per share.b. Show the effects on the firm of a 1%, 5%, 10%, and 20% stock dividend.c. Compare the effects in parts a and b. What are the significant differences between the twomethods of paying dividends? Personal Finance P..>@$1.00 par)
1. As a manager of a FI you consider implementing one of the following strategies: to use forward contracts to
1. As a manager of a FI you consider implementing one of the following strategies: to use forward contracts to hedge interest rate risk or to use futures contracts for hedging interest rate risk. Your risk analytic predicts a significant negative shock to interest rates and relatively stable forecast yields. Durations for these strategies are the same. a) Which strategy would you choose if current yield on bonds is the same as the current level of interest rates? To use forward contracts to hedge interest rate risk or to use futures contracts for hedging interest rate risk. Justify your answer. b) If initially you can buy or sell as many futures as you want would you choose a different strategy in part a)? 2. You are developing a strategy to manage interest rate risk of your portfolio using options on a bond. a) Explain how to use the Black-Scholes model for hedging during the period of crisis. b) Now you need to consider changes in interest rates that will happen only at year end every year. You do not know if interest rates will go up or down, but it can change only by 1 per cent. Show how to hedge interest rate risks over the two-year period using a 6 per cent 10-year T-bond, which is priced at par, $1000 and call options on 100 thousand $ with a strike price of 105$ and intrinsic value $1000. c) Using results from part b) compute an option premium if a discount factor is 4 per cent. 3. Consider the following balance sheet (in millions) for an FI: Assets Liabilities Duration = 10 years $950 Duration = 2 years $860 Equity = $90 (a) What is the FI’s duration gap? (b) What is the FI’s interest rate risk exposure? (c) How can the FI use futures and forward contracts to put on a macrohedge? (d) What is the impact on the FI’s equity value if the relative change in interest rates is an increase of 1 per cent? That is, ∆R/(1 R) = 0.01. (e) Suppose that the FI in part (c) macrohedges using Treasury Bond (TB) futures that are currently priced at 96. What is the impact on the FI’s futures position if the relative change in all interest rates is an increase of 1 per cent? That is, ∆R/(1 R) = 0.01. Assume that the deliverable Treasury Bond has a duration of nine years. (f) If the FI wants to macrohedge, how many Treasury Bond futures contracts does it need? 4. Suppose you consider implementing macrohedging with swaps for two different FIs. One financial institution is small, and another institution is big. Discuss how to implement the macrohedging strategies for these FIs.
A 10-year annuity pays $1,725 per month, and payments are made at the end of each month. The interest rate
A 10-year annuity pays $1,725 per month, and payments are made at the end of each month. The interest rate is 9 percent compounded monthly for the first four years, and 7 percent compounded monthly thereafter. What is present value of the annuity today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
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