Suppose there is a single 5-year zero-coupon debt issue with a maturity value of $120. The expected return on assets is 12%. What is the expected return on equity? The volatility of equity? What happens to the expected return on equity as you vary A, σ, and r?
Answer to relevant QuestionsRepeat the previous problem for debt instead of equity. Suppose you have a project that will produce a single widget. Widgets today cost $1 and the project costs $0.90. The risk-free rate is 5%. Under what circumstances would you invest immediately in the project? What conditions ...Consider the last row of Table 17.1. What is the solution for S*and S* when Ks = kr = 0? (This answer does not require calculation.) Consider the widget investment problem outlined in Section 17.1. Show the following in a spreadsheet. a. Compute annual widget prices for the next 50 years. b. For each year, compute the net present value of investing in ...Let KT = S0erT. Compute Pr(St KT ) for a variety of T s from 0.25 to 25 years. How do the probabilities behave? How do you reconcile your answer with the fact that both call and put prices increase with time?
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