Essentials Of Investments 9th Global Edition Zvi Bodie, Alex Kane, Alan J. Marcus - Solutions

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Which fund would you choose if you were considering investing the entire risky portion of your portfolio? What if you were considering adding a small position in one of these funds?
Examine the performance measures of the funds included in the spreadsheet. Rank the funds by the five performance measures. Are the rankings across funds consistent? What explains these results?
The current level of the S&P 500 is 700. The dividend yield on the S&P 500 is 2%. The risk-free interest rate is 1%. What should a futures contract with a one-year maturity be selling for? (LO 17-3)
On January 1, you sold one March maturity S&P 500 Index futures contract at a futures price of 800. If the futures price is 900 on February 1, what is your profit? The contract multiplier is $250.(LO 17-1)
The hedge ratio of an at-the-money call option on IBM is .12. The hedge ratio of an at-the-money put option is –.59. What is the hedge ratio of an at-themoney straddle position on IBM? (LO 16-5)
According to the Black-Scholes formula, what will be the value of the hedge ratio of a put option for a very small exercise price? (LO 16-5)
According to the Black-Scholes formula, what will be the value of the hedge ra as the stock price becomes infinitely large? Explain briefly. (LO 16-5)
If the time to expiration falls and the put price rises, then what has happened to the put option’s implied volatility? (LO 16-1)
If the stock price falls and the call price rises, then what has happened to the call option’s implied volatility? (LO 16-1)
Should the rate of return of a call option on a long-term Treasury bond be more or less sensitive to changes in interest rates than the rate of return of the underlying bond? (LO 16-1)
All else being equal, will a call option with a high exercise price have a higher or lower hedge ratio than one with a low exercise price? (LO 16-5)
All else being equal, is a call option on a stock with a lot of firm-specific risk worth more than one on a stock with little firm-specific risk? The betas of the stocks are equal. (LO 16-1)
All else being equal, is a put option on a highbeta stock worth more than one on a low-beta stock?The firms have identical firm-specific risk. (LO 16-1)
Would you expect a $1 increase in a call option’s exercise price to lead to a decrease in the option’s value of more or less than $1? (LO 16-1)
What would be the Excel formula in Spreadsheet 16.1 for the Black-Scholes value of a straddle position? (LO 16-3)
Recalculate the value of the option in Problem 16, successively substituting one of the changes below while keeping the other parameters as in Problem 16:Consider each scenario independently. Confirm that the option value changes in accordance with the prediction of Table 16.1. (LO 16-3) a. Time to
Find the Black-Scholes value of a put option on the stock in the previous problem with the same exercise price and expiration as the call option. (LO 16-3)
Use the Black-Scholes formula to find the value of a call option on the following stock: Time to expiration = 6 months Standard deviation = 50% per year Exercise price = $50 Stock price = $50 Interest rate = 3%
Which of the following statements regarding the goal of a delta-neutral portfolio is most accurate? One example of a delta-neutral portfolio is to combine a:(LO 16-5)
Return to the previous problem. Will the number of call options written for a delta-neutral hedge increase or decrease if the stock price falls? (LO 16-5)
BIC owns 51,750 shares of Smith & Oates. The shares are currently priced at $69. A call option on Smith & Oates with a strike price of $70 is selling at$3.50 and has a delta of .69. What is the number of call options necessary to create a delta-neutral hedge?(LO 16-5)
Washington considers a put option that has a delta of –.65. If the price of the underlying asset decreases by $6, then what is the best estimate of the change in option price? (LO 16-5)
After discussing the concept of a delta-neutral portfolio, Washington determines that he needs to further explain the concept of delta. Washington draws the value of an option as a function of the underlying stock price. Draw such a diagram, and indicate how delta is interpreted. Delta is the: (LO
Which of the following best at the expiration date of the options.S substitute explains a delta-neutral portfolio? A delta-neutral portfolio is perfectly hedged against: (LO 16-5)a. Small price changes in the underlying asset.b. Small price decreases in the underlying asset.c. All price changes in
Calculate the value of a call option on the stock in the previous problem with an exercise price of 110. Verify that the put-call parity relationship is satisfied by your answers to both Problems 8 and 9. (Do not use continuous compounding to calculate the present value of X in this example,
We will derive a two-state put option value in this problem. Data: S0 =110; X = 120; 1 + r = 1.10. The two possibilities for ST are 140 and 100.(LO 16-2)
Show that Black-Scholes call option hedge ratios increase as the stock price increases. Consider a one-year option with exercise price $40 on a stock with annual standard deviation 15%. The T-bill rate is 2% per year.Find N(d at the expiration date of the options.S substitute1) for stock prices$35,
Reconsider the determination of the hedge ratio in the two-state model(Section 16.2), where we showed that one-third share of stock would hedge one option. What would be the hedge ratio for each of the following exercise prices: $130, $115, $105, $95? What do you conclude about the hedge ratio as
In each of the following questions, you are asked to compare two options with parameters as given. The risk-free interest rate for all cases should be assumed to be 6%. Assume the stocks on which these options are written pay no dividends. (LO 16-1)
We showed in the text that the value of a call option increases with the volatility of the stock. Is this also true of put option values? Use the put-call parity relationship as well as a numerical example to prove your answer.(LO 16-4)
A call option on Jupiter Motors stock with an exercise price of $80 and one-year expiration is selling at $7. A put option on Jupiter stock with an exercise price of $80 and one-year expiration is selling at $5. If the risk-free rate is 7% and Jupiter pays no dividends, what should the stock price
A put option on a stock with a current price of $52 has an exercise price of $54. The price of the corresponding call option is $5.10. According to put-call parity, if the effective annual risk-free rate of interest is 4% and there are three months until expiration, what should be the value of the
A call option with a strike price of $70 on a stock selling at $85 costs$16.80. What are the call option’s intrinsic and time values? (LO 16-1)
The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, and you are convinced it is going to break far out of that range in the next three months. You do not know whether it will go up or down, however. The current price of the stock is $100 per
Suppose you think FedEx stock is going to appreciate substantially in value in the next year. Say the stock’s current price, S0, is $100, and the call option expiring in one year has an exercise price, X, of $100 and is selling at a price, C, of $10. With$10,000 to invest, you are considering
Imagine that you are holding 6,600 shares of stock, currently selling at $50 per share. You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in
An investor purchases a stock for $51 and a put for $.55 with a strike price of $48. The investor sells a call for $.55 with a strike price of $56. What is the maximum profit and loss for this position? Draw the profit and loss diagram for this strategy as a function of the stock price at
You are a portfolio manager who uses options positions to customize the risk profile of your clients. In each case, what strategy is best given your client’s objective? (LO 15-2)a. • Performance to date: Up 16%.• Client objective: Earn at least 15%.• Your scenario: Good chance of large
The following diagram shows the value of a put option at expiration:accessed on September 4 2012 at the end equal to the Ignoring transaction costs, which of the following statements about the value of the put option at expiration is true? (LO 15-1)a. The expiration value of the short position in
You establish a straddle on Walmart using September call and put options with a strike price of $70. The call premium is $5.25 and the put premium is$6. (LO 15-2)a. What is the most you can lose on this position?b. What will be your profit or loss if Walmart is selling for $56 in September?c. At
An investor buys a call at a price of $5.90 with an exercise price of $54.At what stock price will the investor break even on the purchase of the call?(LO 15-1)
You purchase one IBM October 160 put contract for a premium of $5.35.What is your maximum possible profit? (See Figure 15.1.) (LO 15-1)
Turn back to Figure 15.1, which lists the prices of various IBM options.Use the data in the figure to calculate the payoff and the profits for investments in each of the following October 2011 expiration options, assuming that the stock price on the expiration date is $168. (LO 15-1)
The following price quotations are for exchange-listed options on Primo Corporation common stock.With at the expiration date of the options.S equal to the transaction costs ignored, how much would a buyer have to pay for one call option contract? (LO 15-1)
Why do you think the most actively traded options tend to be the ones that are near the money? (LO 15-1)
We said that options can be used either to scale up or reduce overall portfolio risk. What are some examples of risk-increasing and risk-reducing options strategies? Explain each. (LO 15-2)
Cash flow from operating activities includes: (LO 14-1)a. Inventory increases resulting from acquisitions.b. Inventory changes due to changing exchange rates.c. Interest paid to bondholders.d. Dividends paid to stockho"TI2MR">
Cash flow from investing activities excludes: (LO 14-1)a. Cash paid for acquisitions.b. Cash received from the sale of fixed assets.c. Inventory increases due to a new (internally developed) product line.d. All of the above.
A company’s current ratio is 2. If the company uses cash to retire notes payable due within one year, would this transaction increase or decrease the current ratio? What about the asset turnover ratio?(LO 14-1)
The ABC Corporation has a profit margin on sales below the industry average, yet its ROA is above the industry average. What does this imply about its asset turnover? (LO 14-3)
The Crusty Pie Co., which specializes in apple turnovers, has a return on sales higher than the industry average, yet its ROA is the same as the industry average. How can you explain this? (LO 14-3)
Use the following cash flow data for Rocket Transport to find Rocket’s: (LO 14-1)a. Net cash provided by or used in investing activities.b. Net cash provided by or used in financing activities.c. Net increase or decrease in cash for the year.
Use the following financial statements of Heifer Sports Inc. in Table 14.14 to find Heifer’s: (LO 14-1)a. Inventory turnover ratio in 2012.b. Debt/equity ratio in 2012.c. Cash flow from operating activities in 2012.d. Average collection period.e. Asset turnover ratio.f. Interest coverage ratio.
Rio National Corp. is a U.S.-based company and the largest competitor in its industry. Tables ?
Janet Ludlow’s firm requires all its analysts to use a two-stage DDM and the CAPM to value stocks. Using these measures, Ludlow has valued QuickBrush Company at $63 per share. She now must value SmileWhite Corporation. (LO 13-2)Estimate the intrinsic value of SmileWhite using the table above and
Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry and market data to help in his analysis: (LO 13-3)
Phoebe Black’s investment club wants to buy the stock of either NewSoft, Inc. or Capital Corp. In this connection, Black prepared the following table. You have been asked to help her interpret the data, based on your forecast for a healthy economy and a strong stock market over the next 12
At Litchfield Chemical Corp. (LCC), a director of the company said that the use of dividend discount models by investors is “proof” that the higher the dividend, the higher the stock price. (LO 13-2)a. Using a constant-growth dividend discount model as a basis of reference, evaluate the
Chiptech, Inc., is an established computer chip firm with several profitable existing products as well as some promising new products in development.The company earned $1 per share last year and just paid out a dividend of $.50 per share. Investors believe the company plans to maintain its dividend
Recalculate the intrinsic value of Honda shares using the free cash flow model of Spreadsheet 13.2(available at www.mcgraw-hill.co.uk/textbooks/bodie link to Chapter 13 material). Treat each scenario independently. (LO 13-4)a. Honda’s P/E ratio starting in 2015 will be 13.5.b. Honda’s unlevered
Recalculate the intrinsic value of Honda using the three-stage growth model of Spreadsheet 13.1(available at www.mcgrawhill.co.uk/textbooks/bodie link to Chapter 13 material). Treat each of the following scenarios independently. (LO 13-2)a. ROE in the constant-growth period will be 7.7%.b.
The MoMi Corporation’s cash flow from operations before interest and taxes was $3.4 million in the year just ended, and it expects that this will grow by 5% per year forever. To make this happen, the firm will have to invest an amount equal to 16%of pretax cash flow each year. The tax rate is
The risk-free rate of return is 6.5%, the expected rate of return on the market portfolio is 13%, and the stock of Xyrong Corporation has a beta coefficient of 2.7. Xyrong pays out 50% of its earnings in dividends, and the latest earnings announced were$20 per share. Dividends were just paid and
The stock of Nogro Corporation is currently selling for $25 per share. Earnings per share in the coming year are expected to be $5. The company has a policy of paying out 40% of its earnings each year in dividends. The rest is retained and invested in projects that earn a 20% rate of return per
The FI Corporation’s dividends per share are expected to grow indefinitely by 7% per year. (LO 13-3)a. If this year’s year-end dividend is $10 and the market capitalization rate is 12% per year, what must the current stock price be according to the DDM?b. If the expected earnings per share are
The market consensus is that Analog Electronic Corporation has an ROE = 11% and a beta of 2.00. It plans to maintain indefinitely its traditional plowback ratio of 3/5. This year’s earnings were $2.40 per share. The annual dividend was just paid. The consensus estimate of the coming year’s
a. MF Corp. has an ROE of 20% and a plowback ratio of 30%. If the coming year’s earnings are expected to be $2 per share, at what price will the stock sell? The market capitalization rate is 14%.b. What price do you expect MF shares to sell for in three years? (LO 13-2)
Even Better Products has come out with a new and improved product. As a result, the firm projects an ROE of 30%, and it will maintain a plowback ratio of .30. Its earnings this year will be $3 per share. Investors expect a 16% rate of return on the stock. (LO 13-3)a. At what price and P/E ratio
emphasizing or including only stllar.a. Computer stocks currently provide an expected rate of return of 14%. MBI, a large computer company, will pay a year-end dividend of $4 per share. If the stock is selling at $80 per share, what must be the market’s expectation of the growth rate of MBI
Explain why the following statements are true/false/uncertain. (LO 13-3)a. With all else held constant, a firm will have a higher P/E if its beta is higher.b. P/E will tend to be higher when ROE is higher(assuming plowback is positive).c. P/E will tend to be higher when the plowback rate is higher.
The risk-free rate of return is 6%, the required rate of return on the market is 12%, and High-Flyer stock has a beta coefficient of 1.0. If the dividend per share expected during the coming year, D1, is $2.00 and g = 4%, at what price should a share sell? (LO 13-2)
A common stock pays er share of $4.40. The riskfree rate is 8% and the risk premium for this stock is 3%. If the annual dividend is expected to remain at$4.40, what is the value of the stock? (LO 13-2)
FinCorp’s free cash flow to the firm is reported as$245 million. The firm’s interest expense is $38 million. Assume the tax rate is 30% and the net debt of the firm increases by $7 million. What is the market value of equity if the FCFE is projected to grow at 4% indefinitely and the cost of
Eagle Products’ EBIT is $580, its tax rate is 40%, depreciation is $32, capital expenditures are $72, and the planned increase in net working capital is $38.What is the free cash flow to the firm? (LO 13-4)
Sisters Corp expects to earn $9 per share next year. The firm’s ROE is 14% and its plowback ratio is 60%. If the firm’s market capitalization rate is 10%, what is the present value of its growth opportunities? (LO 13-3)
Miltmar Corporation will pay a year-end dividend of $3, and dividends thereafter are expected to grow at the constant rate of 5% per year. The risk-free rate is 4%, and the expected return on the market portfolio is 15%. The stock has a beta of .84. What is the intrinsic value of the stock? (LO
The market capitalization rate for Admiral Motors Company is 12%. Its expected ROE is 15% and its expected EPS is $7. If the firm’s plowback ratio is 40%, what will be its P/E ratio? (LO 13-2)
A firm has current assets that could be sold for their book value of $40 million. The book value of its fixed assets is $78 million, but they could be sold for $108 million today. The firm has total debt with a book value of$58 million, but interest rate declines have caused the market value of the
Tri-coat Paints has a current market value of $50 per share with earnings of $5.97. What is the present value of its growth opportunities (PVGO) if the required return is 12%? (LO 13-2)
A firm pays a current dividend of $2, which is expected to grow at a rate of 7% indefinitely. If the current value of the firm’s shares is $214, what is the required return applicable to the investment based on the constantgrowth dividend discount model (DDM)? (LO 13-2)
Jand, Inc., currently pays a dividend of $1.42, which is expected to grow indefinitely at 5%. If the current value of Jand’s shares based on the constant-growth dividend discount model is $36.91, what is the required rate of return? (LO 13-2)
Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 18% for two years and then at 5% thereafter. If the required return for Deployment Specialists is 8%, what is the intrinsic value of Deployment Specialists stock? (LO 13-2)
If a security is underpriced (i.e., intrinsic value > price), then what is the relationship between its market capitalization rate and its expected rate of return? (LO 13-2)
In what circumstances is it most important to use multistage dividend discount models rather than constant-growth models? (LO 13-2)
In what circumstances would you choose to use a dividend discount model rather than a free cash flow forecast the .(LO 13-4)
General Weedkillers dominates the chemical weed control market with its patented product Weedex. The patent is about to expire, however. What are your forecasts for changes in the industry?Specifically, what will happen to industry prices, sales, the profit prospects of General Weedkillers, and the
You have $5,000 to invest for the next year and are considering three alternatives:a. A money market fund with an average maturity of 30 days offering a current annualized yield of 3%.b. A one-year savings deposit at a bank offering an interest rate of 4.5%.c. A 20-year U.S. Treasury bond offering
Why do you think the change in the index of labor cost per unit of output is a useful lagging indicator of the macroeconomy? (See Table 12.2.)(LO 12-2)
Why do you think the index of consumer expectations is a useful leading indicator of the macroeconomy? (See Table 12.2.) (LO 12-2)
In which stage of the industry life cycle would you place the following industries? (Warning: There is considerable room for disagreement concerning the“correct” answers to this question.) (LO 12-4)a. Oil well equipmentb. Computer hardware Computer softwared. Genetic engineeringe. Railroads
For each pair of firms, choose the one that you think would be more sensitive to the business cycle.(LO 12-3)a. General Autos or General Pharmaceuticals b.Friendly Airlines or Happy Cinemas
Here are four industries and four forecasts for the macroeconomy. Choose the industry that you would expect to perform best in each scenario. (LO 12-3)
According to supply-side economists, what will be the long-run impact on prices of a reduction in income tax rates? (LO 12-1)
Consider two firms producing smart phones. One uses a highly automated robotics process, while the other uses human workers on an assembly line and pays overtime when there is heavy production demand. (LO 12-3)a. Which firm will have higher profits in a recession?In a boom?b. Which firm’s stock
Unlike other investors, you believe the Fed is going to dramatically loosen monetary policy. What would be your recommendations about investments in the following industries? (LO 12-1)a. Gold miningb. Construction
If you believe the U.S. dollar is about to depreciate more dramatically than do other investors, what will be your stance on investments in U.S. auto producers? (LO 12-1)
What monetary and fiscal policies might be prescribed for an economy in a deep recession? (LO 12-1)
Choose an industry and identify the factors that will determine its performance in the next three years. What is your forecast for performance in that time period? (LO 12-3)
FinanceCorp has fixed costs of $15 million and profits of $10 million. What is its degree of operating leverage (DOL)? (LO 12-3)
If the nominal interest rate is 9% and the inflation rate is 6%, then what is the real interest rate? (LO 12-1)

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Essentials Of Investments 9th Global Edition Zvi Bodie, Alex Kane, Alan J. Marcus - Solutions

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