All Matches

Solution Library

Expert Answer

Textbooks

Search Textbook questions, tutors and Books

Oops, something went wrong!

Change your search query and then try again

Result Not Found

Books FREE
Tutors
Study Help
Ask a Question

Search
Sign In
Register

study help
business
corporate finance

Questions and Answers of Corporate Finance

Consider another perpetual project like the crusher described in Section 19.1. Its initial investment is $1,000,000, and the expected cash inflow is $85,000 a year in perpetuity. The opportunity cost
Suppose the project described in practice question 10 is to be undertaken by a university. Funds for the project will be withdrawn from the university?s endowment, which is invested in a widely
What is meant by an adjusted discount rate (in our notation)? In what circumstances would an adjusted discount rate not equal WACC?
The Bunsen Chemical Company is currently at its target debt ratio of 40 percent. It is contemplating a $1 million expansion of its existing business. This expansion is expected to produce a cash
Curtis Bog, chief financial officer of Sphagnum Paper Corporation, is reviewing a consultant?s analysis of Sphagnum?s weighted-average cost of capital. The consultant proposes Mr. Bog wants to
Nevada Hydro is 40 percent debt-financed and has a weighted-average cost of capital of 9.7 percent: Banker?s Tryst Company is advising Nevada Hydro to issue $75 million of preferred stock at a
Sometimes APV is particularly useful in international capital investment decisions. What kinds of tax or financing side effects are encountered in international projects?
Consider a different financing scenario for the solar water heater project discussed in Section 19.4. The project requires $10 million and has a base-case NPV of $170,000. Suppose the firm happens to
Table 19.4 is a simplified book balance sheet for Phillips Petroleum in June 2001. Other information: (a)?Calculate Phillips?s WACC. Use the capital asset pricing model and the data given
In question 18 you calculated a WACC for Phillips Petroleum. Phillips could also use an industry WACC. Under what conditions would the industry WACC be the better choice? Explain.
Suppose Wishing Well is evaluating a new motel and resort on a romantic site in Madison County, Wisconsin. Explain how you would forecast the after-tax cash flows for this project.
Financing Rule 2 ties the level of future interest tax shields to the future value of the project or company. That means the interest tax shields are risky and worth less than if the company
Discuss briefly the risks and payoffs of the following positions:a. Buy stock and a put option on the stock.b. Buy stock.c. Buy call.d. Buy stock and sell call option on the stock.e. Buy bond.f. Buy
“The buyer of the call and the seller of the put both hope that the stock price will rise. Therefore the two positions are identical.” Is the speaker correct? Illustrate with a position diagram.
Pintail’s stock price is currently $200. A one-year American call option has an exercise price of $50 and is priced at $75. How would you take advantage of this great opportunity? Now suppose the
It is possible to buy three-month call options and three-month puts on stock Q. Both options have an exercise price for $60 and both are worth $10. Is a six-month call with an exercise price of $60
In June 2001 a six-month call on Intel stock, with an exercise price of $22.50, sold for $2.30. The stock price was $27.27. The risk-free interest rate was 3.9 percent. How much would you be willing
The Rank and File Company is considering a rights issue to raise $50 million. An underwriter offers to “stand by” (i.e., to guarantee the success of the issue by buying any unwanted stock at the
FX Bank has succeeded in hiring ace foreign exchange trader, Lucinda Cable. Her remuneration package reportedly includes an annual bonus of 20 percent of the profits that she generates in excess of
Suppose that Mr. Colleoni borrows the present value of $100, buys a six-month put option on stock Y with an exercise price of $150, and sells a six-month put option on Y with an exercise price of
Which one of the following statements is correct?(a) Value of put + present value of exercise price = value of call + share price.(b) Value of put + share price = value of call + present value of
(a) If you can’t sell a share short, you can achieve exactly the same final payoff by a combination of options and borrowing or lending. What is this combination?(b) Now work out the mixture of
The common stock of Triangular File Company is selling at $90. A 26-week call option written on Triangular File’s stock is selling for $8. The call’s exercise price is $100. The risk-free
Digital Organics has 10 million outstanding shares trading at $25 per share. It also has a large amount of debt outstanding, all coming due in one year. The debt pays interest at 8 percent. It has a
Option traders often refer to “straddles” and “butterflies.” Here is an example of each:• Straddle: Buy call with exercise price of $100 and simultaneously buy put with exercise price of
Refer again to the Circular File balance sheet in Section 20.2. Suppose that the government suddenly offers to guarantee the $50 principal payment due bondholders next year and also to guarantee the
Is it more valuable to own an option to buy a portfolio of stocks or to own a portfolio of options to buy each of the individual stocks? Say briefly why.
Table 20.4 lists some prices of options on common stocks (prices are quoted to the nearest dollar). The interest rate is 10 percent a year. Can you spot any mispricing? What would you do to take
You’ve just completed a month-long study of energy markets and conclude that energy prices will be much more volatile in the next year than historically. Assuming you’re right, what types of
In everyday speech the term option often just means “choice,” whereas in finance it refers specifically to the right to buy or sell an asset in the future on terms that are fixed today. Which of
Figure shows some complicated position diagrams. Work out the combination of stocks, bonds, and options that produces each of these positions.
In 1988 the Australian firm Bond Corporation sold a share in some land that it owned near Rome for $110 million and as a result boosted its 1988 earnings by $74 million. In 1989 a television program
Three six-month call options are traded on Hogswill stock: How would you make money by trading in Hogswill options? Now look in the newspaper at options with the same maturity but different exercise
Ms. Higden has been offered yet another incentive scheme (see Section 20.2). She will receive a bonus of $500,000 if the stock price at the end of the year is $120 or more; otherwise she will receive
Johnny Jones?s high school derivatives homework asks for a binomial valuation of a 12- month call option on the common stock of the Overland Railroad. The stock is now selling for $45 per share and
Suppose a stock price can go up by 15 percent or down by 13 percent over the next year. You own a one-year put on the stock. The interest rate is 10 percent, and the current stock price is $60.(a)
Look back at Table 20.2. Now construct a similar table for put options. In each case construct simple example to illustrate your point.
The price of Matterhorn Mining stock is 100 Swiss francs (SFr). During each of the next two six-month periods the price may either rise by 25 percent or fall by 20 percent (equivalent to a standard
Buffelhead’s stock price is $220 and could halve or double in each six-month period (equivalent to a standard deviation of 98 percent). A one-year call option on Buffelhead has an exercise price of
Suppose that you own an American put option on Buffelhead stock (see question 5) with an exercise price of $220.(a) Would you ever want to exercise the put early?(b) Calculate the value of the
Recalculate the value of the Buffelhead call option (see question 5), assuming that the option is American and that at the end of the first six months the company pays a dividend of $25. (Thus the
Suppose that you have an option which allows you to sell Buffelhead stock (see question 5) in month 6 for $165 or to buy it in month 12 for $165. What is the value of this unusual option?
The current price of the stock of Mont Tremblant Air is C$100. During each six-month period it will either rise by 11.1 percent or fall by 10 percent (equivalent to an annual standard deviation of
The current price of United Carbon (UC) stock is $200. The standard deviation is 22.3 percent a year, and the interest rate is 21 percent a year. A one-year call option on UC has an exercise price of
Suppose you construct an option hedge by buying a levered position in delta shares of stock and selling one call option. As the share price changes, the option delta changes, and you will need to
Other things equal, which of these American options are you most likely to want to exercise early?(a) A put option on a stock with a large dividend or a call on the same stock.(b) A put option on a
Is it better to exercise a call option on the with-dividend date or on the ex-dividend date? How about a put option? Explain.
You can buy each of the following items of information about an American call option for $10 apiece: PV (exercise price); exercise price; standard deviation × square root of time to maturity;
Use the formula that relates the value of the call and the put (see Section 21.1) and the one-period binomial model to show that the option delta for a put option is equal to the option delta for a
Show how the option delta changes as the stock price rises relative to the exercise price. Explain intuitively why this is the case. (What happens to the option delta if the exercise price of an
Your company has just awarded you a generous stock option scheme. You suspect that the board will either decide to increase the dividend or announce a stock repurchase program. Which do you secretly
In August 1986 Salomon Brothers issued four-year Standard and Poor’s 500 Index Subordinated Notes (SPINS). The notes paid no interest, but at maturity investors received the face value plus a
Some corporations have issued perpetual warrants. Warrants are call options issued by a firm, allowing the warrant-holder to buy the firm’s stock.. For now, just consider a perpetual call.(a) What
Describe each of the following situations in the language of options:(a) Drilling rights to undeveloped heavy crude oil in Northern Alberta. Development and production of the oil is a negative-NPV
After a good night’s sleep, your boss, the CFO in Section 22.1, still doesn’t understand. Try again. Explain why the Mark I microcomputer has a positive NPV even though DCF analyses of both the
Look again at Table 22.2. How does the value in 1982 of the option to invest in the Mark II change if: (a)?The investment required for the Mark II is $800 million (vs. $900 million)? (b)?The present
You own a one-year call option on 1 acre of Los Angeles real estate. The exercise price is $2 million, and the current, appraised market value of the land is $1.7 million. The land is currently used
A variation on question 4: Suppose the land is occupied by a warehouse generating rents of $150,000 after real estate taxes and all other out-of-pocket costs. The value of the land plus warehouse is
In Section 22.4 we described the problem faced by a utility that was contemplating an investment in equipment that would allow it to burn either oil or gas. How would the value of the option to
Look again at the malted herring example in Section 22.3. Suppose that by postponing the project for a year, you do not miss out on any cash flows. Instead all cash flows are simply delayed by one
Suppose investment in the malted herring project (see Section 22.3) can be postponed to the end of year 2.(a) Build a two-year binomial tree with cash flows proportional to end-of-year values. Under
You have an option to purchase all of the assets of the Overland Railroad for $2.5 billion. The option expires in 9 months. You estimate Overland?s current (month 0) present value (PV) as $2.7
In Section 10.3 we considered two production technologies for a new Wankel-engined outboard motor. Technology A was the most efficient but had no salvage value if the new outboards failed to sell.
Look again at practice question 10. We will assume that Technology A has a salvage value of $7 million, rather than zero. The present value of the project with Technology A is $11.5 million at year
How do the binomial trees used in this chapter differ from the decision trees discussed in Chapter?
Josh Kidding, who has only read part of Chapter, decides to value a real option by (1) setting out a decision tree, with cash flows and probabilities forecasted for each future outcome; (2) deciding
Suppose you expect to need a new plant that will be ready to produce turbo-encabulators in 36 months. If design A is chosen, construction must begin immediately. Design B is more expensive, but you
Consumers appear to require returns of 25 percent or more before they are prepared to make energy-efficient investments, even though a more reasonable estimate of the cost of capital might be
In Chapter, we expressed the value of a share of stock aswhere is earnings per share from existing assets, r is the expected rate of return required by investors, and PVGO is the present value
Associated Elk warrants have an exercise price of $40. The share price is $50. The dividend on the stock is $3, and the interest rate is 10 percent.(a) Would you exercise your warrants now or later?
Moose Stores has outstanding one million shares of common stock with a total market value of $40 million. It now announces an issue of one million warrants at $5 each. Each warrant entitles the owner
Look again at question 2. Suppose that Moose now forecasts the following dividend payments: Reestimate the market values of the warrant and stock.
Occasionally firms extend the life of warrants that would otherwise expire unexercised. What is the cost of doing this?
The Surplus Value Company had $10 million (face value) of convertible bonds outstanding in 2001. Each bond has the following features: (a) What is the bond?s conversion value? (b) Can you explain
Piglet Pies has issued a zero-coupon 10-year bond that can be converted into 10 Piglet shares. Comparable straight bonds are yielding 8 percent. Piglet stock is priced at $50 a share.(a) Suppose that
Iota Microsystems’ 10 percent convertible is about to mature. The conversion ratio is 27.(a) What is the conversion price?(b) The stock price is $47. What is the conversion value?(c) Should you
In each case, state which of the two securities is likely to provide the higher return:(a) When the stock price rises (stock or convertible bond?).(b) When interest rates fall (straight bond or
In 1996 Marriott International made an issue of LYONS. The bond matured in 2011, had a zero coupon, and was issued at $532.15. It could be converted into 8.76 shares. Beginning in 1999 the bonds
“The company’s decision to issue warrants should depend on the management’s forecast of likely returns on the stock.” Do you agree?
Financing with convertible debt is especially appropriate for small, rapidly growing, or risky companies. Explain why.
The Pork Barrel Company has issued three-year warrants to buy 12 percent perpetual debentures at a price of 120 percent. The current interest rate is 12 percent and the standard deviation of returns
The B.J. Services warrant is described in Section 23.1. How would you use the Black–Scholes formula to compute the value of the warrant immediately after its issue, assuming a stock price of $19
Here is a question about dilution. The Electric Bassoon Company has outstanding 2,000 shares with a total market value of $20,000 plus 1,000 warrants with a total market value of $5,000. Each warrant
This question illustrates that when there is scope for the firm to vary its risk, lenders may be more prepared to lend if they are offered a piece of the action through the issue of a convertible
Occasionally it is said that issuing convertible bonds is better than issuing stock when the firm’s shares are undervalued. Suppose that the financial manager of the Butternut Furniture Company
Why might Fisher’s theory about inflation and interest rates not be true?
Under what conditions can the expected real interest rate be negative?
A 6 percent six-year bond yields 12 percent and a 10 percent six-year bond yields 8 percent. Calculate the six-year spot rate. (Assume annual coupon payments.)
Is the yield on high-coupon bonds more likely to be higher than that on low-coupon bonds when the term structure is upward-sloping or when it is downward-sloping?
The one-year spot rate is r1 = 6 percent, and the forward rate for a one-year loan maturing in year 2 is f2 = 6.4 percent. Similarly, f3 = 7.1 percent, f4 = 7.3 percent, and fs = 8.2 percent. What
Suppose your company will receive $100 million at t = 4 but must make a $107 million payment at t = 5. Assume the spot and forward rates from question 5. Show how the company can lock in the interest
Use the rates from question 5 one more time. Consider the following bonds, each with a five-year maturity. Calculate the yield to maturity for each. Which is the better investment (or are they
You have estimated spot rates as follows:(a) What are the discount factors for each date (that is, the present value of $1 paid in year t)?(b) What are the forward rates for each period?(c) Calculate
Look at the spot interest rates shown in question 8. Suppose that someone told you that the six-year spot interest rate was 4.80 percent. Why would you not believe him? How could you make money if he
Look again at the spot interest rates shown in question 8. What can you deduce about the one-year spot interest rate in four years if(a) The expectations theory of term structure is right?(b) The
Discuss the following two opposite statements. Which do you think makes more sense?a. “Leasing is tax avoidance and should be legislated against.”b. “Leasing ensures that the government’s
Many companies calculate the internal rate of return of the incremental after-tax cash flows from financial leases. What problems do you think this may give rise to? To what rate should the IRR be
In Section 24.3 we stated that in 2001 the duration of the 4 5/8s of 2006 was 4.36 years. Construct a table like Table 24.2 to show that this is so.
The formula for the duration of a perpetual bond which makes an equal payment each year in perpetuity is (1 + yield)/yield. If bonds yield 5 percent, which has the longer duration—a perpetual bond
You have just been fired as CEO. As consolation the board of directors gives you a five year consulting contract at $150,000 per year. What is the duration of this contract if your personal borrowing

Showing 1200 - 1300 of 31986

First
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Last

Get In Touch

About Us
Contact Us
Career
Jobs
FAQ
Campus Ambassador

Company Info

Security
Copyrights
Privacy Policy
Terms & Condition
SolutionInn Fee
Scholarship

Services

Sitemap
Fun
Definitions
Become Tutor
Study Help Categories
Recent Questions
Expert Questions

Copyright © 2024 SolutionInn All Rights Reserved.

Get the SolutionInn - Study Help App