Corporate Finance 6th Edition Jonathan Berk, Peter DeMarzo - Solutions

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Suppose that you are currently 32 years old and expect to earn a constant real salary of $85,000 starting next year. You are planning to work for 25 years and then retire. You currently have $10,000 in financial capital. You can invest in the riskfree asset or a broad stock portfolio. The inflation
At the close of trading on October 11, 2013, the stock price of Facebook (FB) was $49.11, the standard deviation of daily returns is 74.73%, the yield on a six-month U.S. Treasury Bill was 0.12%, the exercise price of an March 45 call on Facebook was $45.00, the exercise price of an March 45 put on
Same as before, except we will use an eight-period model to evaluate it. At the close of trading on October 11, 2013, the stock price of Facebook (FB)was $49.11, the standard deviation of daily returns is 74.73%, the yield on a sixmonth U.S. Treasury Bill was 0.12%, the exercise price of an March
Same as before, except we will use the risk neutral method to evaluate it. At the close of trading on October 11, 2013, the stock price of Facebook (FB)was $49.11, the standard deviation of daily returns is 74.73%, the yield on a sixmonth U.S. Treasury Bill was 0.12%, the exercise price of an March
At the close of trading on October 11, 2013, the stock price of Facebook was $49.11, the standard deviation of daily returns is 74.73%, and the option time to maturity was 0.4472 years. Show what happens to the stock price at maturity distribution of the binomial stock price tree as the number of
Same as before, except we will value American options where the underlying stock pays dividends. At the close of trading on October 11, 2013, the stock price of Facebook (FB) was $49.11, the standard deviation of daily returns is 74.73%, the yield on a six-month U.S. Treasury Bill was 0.12%, the
Same as before, except we will use a fifty-period model to evaluate it in order to increase accuracy. At the close of trading on October 11, 2013, the stock price of Facebook (FB) was $49.11, the standard deviation of daily returns is 74.73%, the yield on a six-month U.S. Treasury Bill was 0.12%,
Download three months of daily stock price for any stock that has listed options on it. What is the annual standard deviation of your stock based on continuous returns?
Lookup the current stock price of your stock, use the standard deviation of daily returns you computed, lookup the yield on a six-month U.S. Treasury Bill, lookup the exercise price of a call on your stock that matures in approximately six months, lookup the exercise price of a put on your stock
For the same inputs as problem 2, determine the replicating portfolio and the price of the call and put using an eight-period, replicating portfolio model.
For the same inputs as problem 3, determine the price of the call and put using an eight-period, risk neutral model.
For the same inputs as problem 4 determine the price of the call and put using the average of N and N-1 method to evaluate them.
For the same inputs as problem 4, show what happens to the stock price at maturity distribution of the binomial stock price tree as the number of periods increases. Show what happens to the continuous cumulative return distribution of the binomial stock price tree as the number of periods increases.
Use the same inputs as problem 4. Further, forecast the dividends that you stock pays or make an assumption about the dividends that your stock pays.What is the price of an American call and an American put using an eightperiod, risk neutral model of American options with discrete dividends?
For the same inputs as problem 7, determine the price of an American call and an American put using a fifty-period, risk neutral model of American options with discrete dividends?
Extend the Binomial Option Pricing – Full-Scale Estimation model to determine how fast the binomial option price converges to the price in the Black-Scholes Option Pricing – Basics model. Reduce the Full-Scale model to a 10 period model and to a 20 period model. Increase the 50 period model to
Extend the Binomial Option Pricing – Full-Scale Estimation model to determine how fast the binomial option price with averaging of adjacent odd and even numbers of periods converges to the price in the Black-Scholes Option Pricing – Basics model. As you increase the number of periods in the
The static project value, defined as the net present value of future project cash flows ignoring any real options, is $146 million right now. The standard deviation of static project value is 63.0%, the riskfree rate is 0.00%, the project can be abandoned at any time for a salvage value of $95.0
Same as before, except that the project has the option to expand. The static project value now is $146 million, the standard deviation of static project value is 63.0%, the riskfree rate is 0.00%, the project can be expanded by 75% at any time for an expansion cost of $130.0 million, the time to
Same as before, except that the project has the option to contract. The static project value now is $146 million, the standard deviation of static project value is 63.0%, the riskfree rate is 0.00%, the project can be contracted by 55%at any time for contraction savings of $75.0 million, the time
Same as before, except that the project has the option to choose among all three alternatives: (1) abandonment, (2) expansion, or (3) contraction.The static project value now is $146 million, the standard deviation of static project value is 63.0%, the riskfree rate is 0.00%, the project can be
A project requires two sequential investments, each of which takes time to implement, before the project cash flows are generated. This is a compound option, because it is an option to make the phase 1 investment on top of an option to make the phase 2 investment. The phase 1 investment cost
Option to Abandon. The static project value, defined as the net present value of future project cash flows ignoring any real options, is $283 million right now. The standard deviation of static project value is 69.0%, the riskfree rate is 0.00%, the project can be abandoned at any time for a
Option to Expand. The static project value now is $320 million, the standard deviation of static project value is 62.0%, the riskfree rate is 0.00%, the project can be expanded by 50% at any time for an expansion cost of$90.0 million, the time to project completion is 4.1 years, and an 8 period
Option to Contract. The static project value now is $479 million, the standard deviation of static project value is 85.0%, the riskfree rate is 0.00%, the project can be contracted by 39% at any time for contraction savings of$50.0 million, the time to project completion is 5.7 years, and an 8
Option to Choose. The project has the option to choose among three alternatives: (1) abandonment, (2) expansion, or (3) contraction. The static project value now is $318 million, the standard deviation of static project value is 78.0%, the riskfree rate is 0.00%, the project can be abandoned at any
Compound Option. A project requires two sequential investments, each of which takes time to implement, before the project cash flows are generated.This is a compound option, because it is an option to make the phase 1 investment on top of an option to make the phase 2 investment. The phase 1
At the close of trading on October 11, 2013, the stock price of Facebook (FB) was $49.11, the standard deviation of daily returns is 74.73%, the yield on a six-month U.S. Treasury Bill was 0.12%, the exercise price of an March 45 call on Facebook was $45.00, the exercise price of an March 45 put on
Suppose that Facebook paid dividends in tiny amounts on a continuous basis throughout the year at a 1.0% / year rate. What would be the new price of the call and put?
Download three months of daily stock prices for any stock that has listed options on it and compute the standard deviation of daily returns. Lookup the current stock price of your stock, use the standard deviation of daily returns you just computed, lookup the yield on a six-month U.S. Treasury
Use the same inputs as problem 1. Forecast the continuous dividend that your stock pays or make an assumption about the continuous dividend that your stock pays. Determine the price of the call and put using the Black-Scholes continuous dividend model.
Perform instant experiments on whether changing various inputs causes an increase or decrease in the Call Price and in the Put Price and by how much.(a.) What happens when the standard deviation is increased?(b.) What happens when the time to maturity is increased?(c.) What happens when the
The Value of the Firm (V) is $340 million, the Face Value of the Debt(B) is $160 million, the time to maturity of the debt (t) is 2.00 years, the riskfree rate ( RF k ) is 5.0%, and the standard deviation of the return on the firm’s assets(σ) is 50.0%. There are two different methods for valuing
What impact does the firm's risk have upon the firm's Debt and Equity valuation? Specifically, if you increased Firm Asset Standard Deviation, then what would happen to the firm’s Equity Value and Risky Debt Value?
The Value of the Firm (V) is $780 million, the Face Value of the Debt (B) is$410 million, the time to maturity of the debt (t) is 1.37 years, the riskfree rate ( RF k ) is 3.2%, and the standard deviation of the return on the firm’s assets (σ) is 43.0%. Using both methods of debt and equity
Determine what impact an increase in the Firm Asset Standard Deviation has on the firm’s Equity Value and Risky Debt Value.
Task. How to Freeze column titles at the top of the columns and/or freeze row titles on the left side of the rows. This is especially useful for large spreadsheets.
Task. How to Add a spin button to make an input interactive.
Task. How to Add option buttons to allow input choices
Task. How to Add a scroll bar call option to make big or small changes to an input.
Task. How to Install Solver or the Analysis Tool Pak.
Task. How to Create a two-dimensional Scatter Chart.
Task. How to Create a three-dimensional Surface Chart.
A single cash flow of $1,000.00 will be received in 5 periods. For this cash flow, the appropriate discount rate / period is 6.0%. What is the present value of this single cash flow?
A single cash flow of $747.26 is available now (in period 0). For this cash flow, the appropriate discount rate / period is 6.0%. What is the period 5 future value of this single cash flow?
A single cash flow of $1,723.48 will be received in 6 periods. For this cash flow, the appropriate discount rate / period is 6.8%. What is the present value of this single cash flow?
A single cash flow of $1,032.47 is available now (in period 0). For this cash flow, the appropriate discount rate / period is 2.9%. What is the period 5 future value of this single cash flow?
Examine several recent mergers and suggest the principal motives for merging in each case.
In Section 30-5, we described a three-month bill that was issued on an annually compounded yield of 5%. Suppose that one month has passed and the investment still offers the same annually compounded return. What is the percentage discount? What was your return over the month?
The websites of the major commodities exchanges provide futures prices. Calculate the annualized net convenience yield for a commodity of your choice. (Note: You may need to use the futures price of a contract that is about to mature as your estimate of the current spot price.)
Go to finance.yahoo.com and select three industrial companies that have been experiencing difficult times.a. Are the companies’ troubles reflected in their financial ratios? (You may find it helpful to refer to Figure 23.4.)b. Now look at the company’s bond rating. Do the two measures provide
Look at the stocks listed in Table 7.3. Pick at least three stocks, and find call option prices for each of them on finance.yahoo.com. Now find monthly adjusted prices and calculate the standard deviation from the monthly returns using the Excel function STDEV.P. Convert the standard deviation from
Look at actual trading prices of call options on stocks to check whether they behave as the theory presented in this chapter predicts. For example,a. Follow several options as they approach maturity. How would you expect their prices to behave? Do they actually behave that way?b. Compare two call
Take another look at the APV calculation for the perpetual crusher project in Section 19-4. This time assume that the corporation investing in the project has hit the 30% constraint on interest deductions as a percentage of EBITDA. How does the constraint change the project’s APV? Notice that the
1. Look up Johnson & Johnson on Yahoo! Finance.a. Recalculate book- and market-value balance sheets using the most recent available financial information. Use the same format as for Table 18.4.b. Track Johnson & Johnson’s long-term debt and debt ratio over the last five years (you will need to go
Select three or four companies from the Yahoo! Finance database. Estimate how much more these companies could borrow before they would exhaust taxable profits.You can download data for the following questions from the Yahoo! Finance website (www.finance.yahoo.com).
The website www.federalreserve.gov/releases/z1/current/default.htm provides data on sources of funds and an aggregate balance sheet for nonfarm nonfinancial corporations. Look at Table F.102 for the latest year. What proportion of the cash that companies needed was generated internally, and how
Look at the companies listed in Table 8.2. Calculate monthly rates of return for two successive five-year periods. Calculate betas for each subperiod using the Excel SLOPE function. How stable was each company’s beta? Suppose that you had used these betas to estimate expected rates of return from
Find a low-risk stock—Walmart or Kellogg would be a good candidate. Use monthly returns for the most recent three years to confirm that the beta is less than 1.0. Now estimate the annual standard deviation for the stock and the S&P index, and the correlation between the returns on the stock and
Download to a spreadsheet the last five years of monthly adjusted stock prices for each of the companies in Table 7.5 and for the Standard & Poor’s Composite Index (S&P 500).a. Calculate the monthly returns.b. Calculate beta for each stock using the Excel function SLOPE, where the “y” range
Download to a spreadsheet the last three years of monthly adjusted stock prices for Coca- Cola (KO), Citigroup (C), and Pfizer (PFE).a. Calculate the monthly returns.b. Calculate the monthly standard deviation of those returns (see Section 7-2). Use the Excel function STDEVP to check your answer.
Bond transactions are reported on FINRA’s TRACE service, which was the source of the data for Table 3.7. Use the Advanced Search facility in TRACE to find bond prices for Johnson & Johnson (JNJ), Walmart (WMT), Disney (DIS), SunTrust Banks (STI), and U.S. Steel (X). If possible, exclude callable
You have just turned 22 years old, received your bachelor’s degree, and accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works as follows: Every dollar in the plan earns 7% per year. You cannot make withdrawals until you retire on your 65th
You have been accepted into college. The college guarantees that your tuition will not increase for the four years you attend. The first $10,000 tuition payment is due in six months. After that, the same payment is due every six months until you have made a total of eight payments. The college
You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000. The mortgage is currently exactly I8V2 years old, and you have just made a payment. If the interest rate on the mortgage is 5.25% (APR),
You have just purchased a car and taken out a $50,000 loan. The loan has a five-year term with monthly payments and an APR of 6%.a. How much will you pay in interest, and how much will you pay in principal, during the first month, second month, and first year? (Hint: Compute the loan balance after
Consider again the setting of Problem 21.Now that you realize your best investment is to prepay your student loan, you decide to prepay as much as you can each month. Looking at your budget, you can afford to pay an extra $250 per month in addition to your required monthly payments of $500, or $750
You are a broker for frozen seafood products for Choyce Products. You just signed a deal with a Belgian distributor. Under the terms of the contract, in one year you will deliver 4000 kilograms of frozen king crab for 100,000 euros. Your cost for obtaining the king crab is $$110,000.$ All cash
Mia Caruso Enterprises, a U.S. manufacturer of children’s toys, has made a sale in India and is expecting a 400 million rupee cash inflow in one year. (The currency of India is the rupee). The current spot rate is S = $0.022/rupee and the one-year forward rate is F1 = $0.021/rupee.a. What is the
Etemadi Amalgamated, a U.S. manufacturing firm, is considering a new project in Portugal. You are employed in Etemadi’s corporate finance department and are responsible for deciding whether to undertake the project. The expected free cash flows, in euros, are shown here:You know that the spot
Peripatetic Enterprises, a U.S. import-export trading firm, is considering its international tax situation. Tax law in the Unites States requires U.S. corporations to pay taxes on their foreign earnings at the same rate as profits earned in the United States; this rate is currently 45%. However, a
Parnassus Corporation plans to invest $150 million in a new generator that will produce free cash flows of $20 million per year in perpetuity. The firm is all equity financed, with an equity cost of capital of 10%.a. What is the NPV of the project ignoring any costs of raising funds?b. Suppose the
Cisoft is a highly profitable technology firm that currently has $5 billion in cash. The firm has decided to use this cash to repurchase shares from investors, and it has already announced these plans to investors. Currently, Cisoft is an all-equity firm with 5 billion shares outstanding. These
Schwartz Industry is an industrial company with 100 million shares outstanding and a market capitalization (equity value) of $4 billion. It has $2 billion of debt outstanding. Management have decided to delever the firm by issuing new equity to repay all outstanding debt.a. How many new shares must
Zetatron is an all-equity firm with 100 million shares outstanding, which are currently trading for $7.50 per share. A month ago, Zetatron announced it will change its capital structure by borrowing $100 million in short-term debt, borrowing $100 million in long-term debt, and issuing $100 million
Consider the entrepreneur described in Section 14.1 (and referenced in Tables 14.1–14.3).Suppose she funds the project by borrowing $750 rather than $500.a. According to MM Proposition I, what is the value of the equity? What are its cash flows if the economy is strong? What are its cash flows if
Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares.a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt
Global Pistons (GP) has common stock with a market value of $200 million and debt with a value of $100 million. Investors expect a 15% return on the stock and a 6% return on the debt.Assume perfect capital markets.a. Suppose GP issues $100 million of new stock to buy back the debt. What is the
Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $15 million due in one year. If left vacant, the land will be worth $10 million in one year.Alternatively, the firm can develop the land at an up-front cost of $20 million. The developed land will be
Zymase is a biotechnology start-up firm. Researchers at Zymase must choose one of three different research strategies. The payoffs (after-tax) and their likelihood for each strategy are shown below. The risk of each project is diversifiable.a. Which project has the highest expected payoff ?b.
Your firm needs to raise $100 million in funds. You can borrow short term at a spread of 1%over LIBOR. Alternatively, you can issue 10-year, fixed-rate bonds at a spread of 2.50% over 10-year Treasuries, which currently yield 7.60%. Current 10-year interest rate swaps are quoted at the LIBOR rate
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $5 million on TV, radio, and print advertising this year for the campaign. The ads are expected to boost sales of the Mini Mochi Munch by$9 million this year
Xia Corporation is a company whose sole assets are $100,000 in cash and three projects that it will undertake. The projects are risk-free and have the following cash flows:Xia plans to invest any unused cash today at the risk-free interest rate of 10%. In one year, all cash will be paid to
Natsam Corporation has $250 million of excess cash. The firm has no debt and 500 million shares outstanding with a current market price of $15 per share. Natsam’s board has decided to pay out this cash as a one-time dividend.a. What is the ex-dividend price of a share in a perfect capital
Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store across town from its most successful retail outlet. The company already owns the land for this store,
Hyperion, Inc. currently sells its latest high-speed color printer, the Hyper 500, for $350. It plans to lower the price to $300 next year. Its cost of goods sold for the Hyper 500 is $200 per unit, and this year’s sales are expected to be 20,000 units.a. Suppose that if Hyperion drops the price
Your friend tells you he has a very simple trick for shortening the time it takes to repay your mortgage by one-third: Use your holiday bonus to make an extra payment on January 1 of each year (that is, pay your monthly payment due on that day twice). Assume that the mortgage has an original term
You have just started your summer internship, and your boss asks you to review a recent analysis that was done to compare three alternative proposals to enhance the firm’s manufacturing facility. You find that the prior analysis ranked the proposals according to their IRR, and recommended the
Which of the following companies are likely to have high short-term financing needs? Why?a. A clothing retailerb. A professional sports teamc. An electric utilityd. A company that operates toll roadse. A restaurant chain Appendix
Sailboats Etc. is a retail company specializing in sailboats and other sailing-related equipment.The following table contains financial forecasts as well as current (month 0) working capital levels. During which months are the firm’s seasonal working capital needs the greatest? When does it have
What is the difference between permanent working capital and temporary working capital?Appendix
Quarterly working capital levels for your firm for the next year are included in the following table. What are the permanent working capital needs of your company? What are the temporary needs?Appendix Quarter ($000) 1 2 3 4 Cash $100 $100 $100 $100 Accounts Receivable 200 100 100 600 Inventory 200
Why might a company choose to finance permanent working capital with short-term debt?Appendix
Consider two loans with a 1-year maturity and identical face values: an 8% loan with a 1% loan origination fee and an 8% loan with a 5% (no-interest) compensating balance requirement.Which loan would have the higher effective annual rate? Why?Appendix
What is the difference between evergreen credit and a revolving line of credit?Appendix
Which of the following one-year $1000 bank loans offers the lowest effective annual rate?a. A loan with an APR of 6%, compounded monthlyb. A loan with an APR of 6%, compounded annually, that also has a compensating balance requirement of 10% (on which no interest is paid)c. A loan with an APR of
The Spendit Corporation borrowed $10,000 from Bank Ease. According to the terms of the loan, Spendit must pay the bank $400 in interest every three months for the three-year life of the loan, with the principal to be repaid at the maturity of the loan. What effective annual rate is Spendit
The Treadwater Bank wants to raise $1 million using three-month commercial paper. The net proceeds to the bank will be $985,000. What is the effective annual rate of this financing for Treadwater?Appendix
Magna Corporation has an issue of commercial paper with a face value of $1,000,000 and a maturity of six months. Magna received net proceeds of $973,710 when it sold the paper. What is the effective annual rate of the paper to Magna?Appendix
What is the difference between direct paper and dealer paper?Appendix

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Corporate Finance 6th Edition Jonathan Berk, Peter DeMarzo - Solutions

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