New Semester
Started
Get
50% OFF
Study Help!
--h --m --s
Claim Now
Question Answers
Textbooks
Find textbooks, questions and answers
Oops, something went wrong!
Change your search query and then try again
S
Books
FREE
Study Help
Expert Questions
Accounting
General Management
Mathematics
Finance
Organizational Behaviour
Law
Physics
Operating System
Management Leadership
Sociology
Programming
Marketing
Database
Computer Network
Economics
Textbooks Solutions
Accounting
Managerial Accounting
Management Leadership
Cost Accounting
Statistics
Business Law
Corporate Finance
Finance
Economics
Auditing
Tutors
Online Tutors
Find a Tutor
Hire a Tutor
Become a Tutor
AI Tutor
AI Study Planner
NEW
Sell Books
Search
Search
Sign In
Register
study help
business
principles corporate finance
Corporate Finance With Powerweb 6th Edition Stephen A. Ross - Solutions
A put is trading on Simpsons Entertainment stock. It has a strike price of \($50\).a. What is the payoff at expiration of this put if, on the expiration date, Simpsons stock sells for \($55\)?b. What is the payoff at expiration of this put if, on the expiration date, Simpsons stock sells for
Suppose you bought two Xerox call contracts and one Xerox put contract, both of which will expire in three months. The exercise price of the call is \($70\) and the exercise price of the put is \($75.\) Each option is sold as a 100-share contract.a. What is your payoff at expiration of your
You hold a six-month European call-option contract on Sertile stock. The exercise price of the call is \($100\) per share. The option will expire in moments. Assume there are no transactions costs or taxes associated with this contract.a. What is your profit on this contract if the stock is selling
General Furnishings, Inc., has both call and put options traded on the Chicago Board Options Exchange. Both options have the same exercise price of \($40\) and the same expiration date. The options will expire in one year. The call is currently selling for \($8\) per share and the put is selling
Piersol Paper Mill’s common stock currently sells for \($145.\) Both puts and calls on Piersol Paper are being traded. These options all expire eight months from today, and they have a strike price of \($160.\) Eight months from today, Piersol Paper common stock will sell for \($172\) with a
Suppose you observe the following market prices:a. What should you do?b. What is your profit or loss?c. What do opportunities such as this imply about the lower bound on the price of American calls?d. What is the upper bound on the price of American calls? Explain. American call (Strike = $50)
List the factors that determine the value of an American put option. State how a change in each factor alters the option’s value.
You bought a 100-share call contract three weeks ago. The expiration date of the calls is five weeks from today. On that date, the price of the underlying stock will be either \($120\) or \($95.\) The two states are equally likely to occur. Currently, the stock sells for \($96;\) its strike price
Wellington Company stock is currently selling for \($30\) per share. It is expected that the stock price will be either \($25\) or \($35\) in six months. Treasury bills that will mature in six months yield 5 percent. What is the price of Wellington put option per share that has an exercise price of
Assume only two states will exist one year from today when a call on Delta Transportation, Inc., stock expires. The price of Delta stock will be either \($60\) or \($40\) on that date. Today, Delta stock trades for \($55.\) The strike price of the call is \($50.\) The rate at which you can borrow
Use the Black-Scholes model to price a call with the following characteristics: Stock price = $62 Strike price = $70 Time to expiration = 4 weeks Stock-price variance = 0.35 Risk-free interest rate = 0.05
Use the Black-Scholes model to price a call with the following characteristics: Stock price = $52 Strike price = $48 Time to expiration = 120 days Stock-price variance = 0.04 Risk-free interest rate = 0.05
a. Use the Black-Scholes model to price a call with the following characteristics:b. What does put-call parity imply the price of the corresponding put will be? Stock price = $45 Strike price = $52 Time to expiration = 6 months Stock-price variance = 0.40 Risk-free interest rate = 0.065
a. Use the Black-Scholes model to price a call with the following characteristics:b. What does put-call parity imply the price of the corresponding put will be? Stock price = $70 Strike price = $90 Time to expiration = 6 months Stock-price variance = 0.25 Risk-free interest rate = 0.06
Consider a call option on Computer Plus Company stock. The option will expire one year from today and the exercise price is \($35.\) The risk-free rate is 7 percent. Computer Plus stock is selling for \($37\) per share and your estimate of variance of the return on the stock is 0.004.a. Use the
You have been asked by a client to determine the maximum price he should be willing to pay to purchase a Kingsley call. The options have an exercise price of \($25,\) and they expire in 120 days. The current price of Kingsley stock is \($27,\) the annual risk-free rate is 7 percent, and the
It is said that the equity in a levered firm is like a call option on the underlying assets.Explain what is meant by this statement.
Global Real Estate Partners, LTD., is undertaking a new project. If the project is successful, the value of the firm in a year will be \($650\) million, but if it turns out to be a failure, the firm will be worth only \($250\) million. The current value of the firm is \($400\) million. The firm has
Suppose Global Real Estate Partners, LTD., in the above problem decided to undertake a riskier project: The value of the firm in a year will be either \($800\) million or \($100\) million, depending on the success of the project. What is the value of the equity? What is the value of the debt? Which
Define the following terms related to the issuance of public securities.a. General cash offerb. Rights offerc. Registration statementd. Prospectuse. Initial public offeringf. Seasoned new issue g. Shelf registration
a. What does the Securities Exchange Act of 1933 regulate?b. What does the Securities Exchange Act of 1934 regulate?
Define the following terms related to underwriting.a. Firm commitmentb. Syndicatec. Spreadd. Best efforts
a. Who bears the risk in firm-commitment underwriting? Explain.b. Who bears the risk in best-efforts underwriting? Explain.
Suppose the Newton Company has 10,000 shares of stock. Each share is worth \($40,\) and the company’s market value of equity is \($400,000.\) Suppose the firm issues 5,000 shares of the new stock at the following prices: \($40,\) \($20,\) and \($10.\) What will be the effect of each of the
Bountiful Beef Processors (BBP) wants to raise equity through a rights offering. BBP has 2,400,000 shares of common stock outstanding, and must raise \($12,000,000.\) The subscription price of the rights will be \($15\).a. How many new shares of stock must BBP issue?b. How many rights will be
Jelly Beans, Inc., is proposing a rights offering. There are 100,000 outstanding shares at\($25\) each. There will be 10,000 new shares issued at a \($20\) subscription price.a. What is the value of a right?b. What is the ex-rights price?c. What is the new market value of the company?d. Why might a
Superior, Inc., is a manufacturer of beta-blockers. Management has concluded that additional equity financing is required to increase production capacity, and that these funds are best attained through a rights offering. It has correctly concluded that, as a result of the rights offering, share
A company’s stock currently sells for \($45\) per share. Last week the firm issued rights to raise new equity. To purchase a new share, a stockholder must remit \($10\) and three rights.a. What is the ex-rights stock price?b. What is the price of one right?c. When will the price drop occur? Why
Summit Corp.’s stock is currently selling at \($13\) per share. There are 1 million shares outstanding. The firm is planning to raise \($2\) million to finance a new project. What is the ex-right stock price, the value of a right, and the appropriate subscription prices, ifa. Two shares of
What are the uses for the proceeds from an IPO?
Identify and describe each of the following dates that are associated with a dividend payment on common stock:February 16 February 24 February 26 March 14
On April 5, the board of directors of Capital City Golf Club declared a dividend of \($.75\) per share payable on Tuesday, May 4, to shareholders of record as of Tuesday, April 20.Suppose you bought 350 shares of Capital City stock on April 6 for \($8.75\) a share. Assume there are no taxes, no
The Mann Company belongs to a risk class for which the appropriate discount rate is 10 percent. Mann currently has 100,000 outstanding shares selling at \($100\) each. The firm is contemplating the declaration of a \($5\) dividend at the end of the fiscal year that just began.Answer the following
On February 17, the board of directors of Exertainment Corp. declared a dividend of \($1.25\) per share payable on March 18 to all holders of record on March 1. All investors are in the 31-percent tax bracket.a. What is the ex-dividend date?b. Ignoring personal taxes, how much should the stock
Andahl Corporation stock, of which you own 500 shares, will pay a \($2-per-share\) dividend one year from today. Two years from now Andahl will close its doors; stockholders will receive liquidating dividends of \($17.5375\) per share. The required rate of return on Andahl stock is 15 percent.a.
The net income of Novis Corporation, which has 10,000 outstanding shares and a 100-percent payout policy, is \($32,000.\) The expected value of the firm one year hence is\($1,545,600.\) The appropriate discount rate for Novis is 12 percent.a. What is the current value of the firm?b. What is the
Gibson Co. has a current period cash flow of \($1.2\) million and pays no dividends, and the present value of forecasted future cash flows is \($15\) million. It is an all-equity-financed company with 1 million shares outstanding. Assume the effective personal tax rate is zero.a. What is the share
The University of Pennsylvania pays no taxes on capital gains, dividend income, or interest payments. Would you expect to find low-dividend, high-growth stock in the university’s portfolio? Would you expect to find tax-free municipal bonds in the portfolio?
In their 1970 paper on dividends and taxes, Elton and Gruber reported that the exdividend–date drop in a stock’s price as a percentage of the dividend should equal the ratio of 1 minus the ordinary income tax rate to 1 minus the capital gains rate; that is,a. If To = Tc = 0, how much will the
A political advisory committee recently recommended wage and price controls to prevent the spiraling inflation that was experienced in the 1970s. Members of the investment community and several labor unions have sent the committee reports that discuss whether or not dividends should be under the
Deaton Co. and Grebe, Inc., are in the same risk class. Shareholders expect Deaton to pay a \($4\) dividend next year when the stock will sell for \($20.\) Grebe has a no-dividend policy. Currently, Grebe stock is selling for \($20\) per share. Grebe shareholders expect a \($4\) capital gain over
Payall Inc., Payless Inc., and Paynone Inc. are equally risky. They follow a 100-percent, 50-percent, and zero payout policy, respectively. The expected share prices at dates 0 and 1 for Paynone Inc. are \($100\) and \($125.\) The market prices are set so that their after-tax expected returns are
In the May 4, 1981, issue of Fortune, an article entitled “Fresh Evidence That Dividends Don’t Matter” stated, “All told, 115 companies of the 500 [largest industrial corporations] raised their payout every year during the period [1970–1989]. Investors in this . . . group would have fared
Southern Established Inc. has been paying out regular quarterly dividends ever since 1983. It just slashed the dividend by half in the current fiscal quarter and a more severe cut is to be underway. Southern’s stock price dropped from \($35.25\) to \($31.75\) when the dividend cut was announced.
The Sharpe Co. has a period 0 dividend of \($1.25.\) Its target payout ratio is 40 percent. The period 1 EPS is expected to be \($4.5\).a. If the adjustment rate is 0.3 as defined in the Lintner Model, what will be the Sharpe Co. dividend in period 1?b. If the adjustment rate is 0.6 instead, what
Good Time Co. is a regional chain department store. It will remain in business for one more year. The estimated probability of a boom year is 60 percent and that of a recession is 40 percent. It is projected that Good Time will have total cash flow of \($250\) million in a boom year and \($100\)
Nadus Corporation and Logis Corporation are identical in every way except their capital structures. Nadus Corporation, an all-equity firm, has 5,000 shares of stock outstanding;each share sells for \($20.\) Logis Corporation uses leverage in its capital structure. The market value of Logis
Acetate, Inc., has common stock with a market value of \($20\) million and debt with a market value of \($10\) million. The cost of the debt is 14 percent. The current Treasury-bill rate is 8 percent, and the expected market premium is 10 percent. The beta on Acetate’s equity is 0.9.a. What is
No Lights At Wrigley, Inc. (NLAW), is a Hong Kong–based corporation that sells sunglasses. The firm pays no corporate taxes, and its shareholders pay no personal income taxes. NLAW currently has 100,000 shares outstanding worth $50 each; the firm has no debt.Consider three stockholders of NLAW,
Rayburn Manufacturing is currently an all-equity firm. The firm’s equity is worth \($2\) million. The cost of that equity is 18 percent. Rayburn pays no taxes.Rayburn plans to issue \($400,000\) in debt and to use the proceeds to repurchase stock.The cost of debt is 10 percent.a. After Rayburn
Strom, Inc., has 250,000 outstanding shares of stock that sell for \($20\) per share. Strom, Inc., currently has no debt. The appropriate discount rate for the firm is 15 percent.Strom’s earnings last year were \($750,000.\) The management expects that if no changes affect the assets of the firm,
Suppose there are no taxes, no transaction costs, and no costs of financial distress. In such a world, are the following statements true, false, or uncertain? Explain your answers.a. If a firm issues equity to repurchase some of its debt, the price of the remaining shares will rise because those
The Digital Sound Corporation has 1 million shares of common stock outstanding at \($10\) per share. It is an all-equity firm. Susan Wang is CEO at Wang Finance Ltd. She wants to acquire a stake of 1 percent of the firm but has not decided among the three possible financing choices. She can borrow
Sunrise Industries Corp. is planning to repurchase part of its common stock in the open market by issuing corporate debt. As a result, the debt-to-equity ratio is expected to rise from 40 percent to 50 percent. The annual interest payment on its outstanding debt amounts to \($0.75\) million with an
The market value of a firm with \($500,000\) of debt is \($1,700,000.\) EBIT is expected to be a perpetuity. The pretax interest rate on debt is 10 percent. The company is in the 34-percent tax bracket. If the company was 100-percent equity financed, the equityholders would require a 20-percent
Olbet, Inc., is a nongrowth company in the 35-percent tax bracket. Olbet’s perpetual EBIT is \($1.2\) million per annum. The firm’s pretax cost of debt is 8 percent and its interest expense per year is \($200,000.\) Company analysts estimate that the unlevered cost of Olbet’s equity is 12
The Nikko Company has perpetual EBIT of \($4\) million per year. The after-tax, all-equity discount rate r0 is 15 percent. The company’s tax rate is 35 percent. The cost of debt capital is 10 percent, and Nikko has \($10\) million of debt in its capital structure.a. What is Nikko’s value?b.
General Tools (GT) expects EBIT to be \($100,000\) every year, in perpetuity. The firm can borrow at 10 percent. GT currently has no debt. Its cost of equity is 25 percent. If the corporate tax rate is 40 percent, what is the value of the firm? What will the value be if GT borrows \($500,000\) and
Eureka Space Technology Group (an all-equity firm) is announcing a \($100\) million R&D project, which is expected to drastically improve its satellite launching technology by reducing its annual launching costs from \($500\) million to \($475\) million. The firm can finance the project through
Many empirical studies have documented that firms that issue stock usually experience a period of price run-up before the public stock offering. Alex Johnson invests primarily in firms that have just carried out new stock offerings. Based on the evidence that these firms have generally performed
Many investors (sometimes called technical analysts) claim to observe patterns in stock market prices. Is technical analysis consistent with EMH? If the stock price follows a random walk model, can technical analysts systematically profit from trading rules based on patterns in the historical stock
Prospectors, Inc., is a small publicly traded gold-prospecting company in Alaska. Usually its searches prove fruitless; however, occasionally the prospectors find a rich vein of ore.a. What pattern would you expect to observe for Prospectors’ cumulative abnormal returns?b. Is this a random walk?
You are conducting a cumulative average residual study on the effect of airline companies’ buying new planes. The announcement dates for the purchase of the planes were July 18 (7/18) for Delta, February 12 (2/12) for United, and October 7 (10/7) for American. Construct a cumulative abnormal
The following diagram shows the cumulative abnormal returns on the stock prices of 386 oil- and gas-exploration companies that announced oil discoveries in month 0. The sample was drawn from 1950 to 1980, and no single month had more than six announcements. Is the diagram consistent with market
The following diagram represents the hypothetical results of a study of the behavior of the stock prices of firms that lost antitrust cases. Included are all firms that lost the initial court decision, even if it was later overturned on appeal. Is the diagram consistent with market efficiency? Why
The following figures present the results of four cumulative-average-residual studies conducted to test the semistrong form of the efficient-market hypothesis. Indicate in each case whether the results of the study support, reject, or are inconclusive about the hypothesis. In each figure, time 0 is
Several years ago, just before Arco purchased the firm, Kennecott Copper Corporation had large amounts of marketable securities as a consequence of receiving compensation for some overseas expropriations and other factors. For a period of time before Arco’s purchase, the market value of Kennecott
Although mutual fund managers frequently claim that they have investing strategies, under the EMH, mutual fund managers should obtain the same returns after adjusting for the risk level of their respective investments. Therefore, we can simply pick mutual funds at random. Is this statement true or
A pension manager intends to unload a large block of Bob’s Toy Inc. shares.a. What are the general empirical findings on the price effect of block trading?b. Do you consider it a good idea for the pension manager to break up the trades to several lots instead of one big block at a time?c. What is
Assume that markets are efficient. Suppose that during a trading day, important new information is released for the first time concerning American Golf Inc. This information indicates that the firm has lost a contract for a large golf-course project that the market widely believed the firm had
The returns for the past five years on Douglas stock and the New York Stock Exchange Composite Index (NYSE) are listed below:a. What are the average returns on Douglas stock and on the market?b. Compute the beta of Douglas stock. Douglas NYSE -0.05 -0.12 0.05 0.01 0.08 0.06 0.15 0.10 0.10 0.05
Mitsubishi Inc. is a levered firm with a debt-to-equity ratio of 0.25. The beta of common stock is 1.15, while the beta of debt is 0.3. The market-risk premium is 10 percent and the risk-free rate is 6 percent. The corporate tax rate is 35 percent. The SML holds for the company.a. If a new project
The correlation between the returns on Ceramics Craftsman, Inc., and the returns on the S&P 500 is 0.675. The variance of the returns on Ceramics Craftsman, Inc., is 0.004225, and the variance of the returns on the S&P 500 is 0.001467. What is the beta of Ceramics Craftsman stock?
The returns from the past 13 quarters on Mercantile Bank Corporation and the market are listed below.a. What is the beta of Mercantile Bank Corporation stock?b. Is Mercantile’s beta higher or lower than the beta of the average stock? Mercantile Market -0.009 0.051 0.023 0.058 -0.001 -0.020 -0.045
Pacific Cosmetics is evaluating a project to produce a perfume line. Pacific currently produces no body-scent products. Pacific Cosmetics is an all-equity firm.a. Should Pacific Cosmetics use its stock beta to evaluate the project?b. How should Pacific Cosmetics compute the beta to evaluate the
The following table lists possible rates of return on Compton Technology’s stock and debt, and on the market portfolio. The corporate tax rate is 35 percent. The corresponding probabilities are also listed.a. What is the beta of Compton Technology debt?b. What is the beta of Compton Technology
The equity beta for Adobe Online Company is 1.29. Adobe Online has a debt-to-equity ratio of 1.0. The expected return on the market is 13 percent. The risk-free rate is 7 percent. The cost of debt capital is 7 percent. The corporate tax rate is 35 percent.a. What is Adobe Online’s cost of
Calculate the weighted average cost of capital for the Luxury Porcelain Company. The book value of Luxury’s outstanding debt is \($60\) million. Currently, the debt is trading at 120 percent of book value and is priced to yield 12 percent. The 5 million outstanding shares of Luxury stock are
First Data Co. has 20 million shares of common stock outstanding that are currently being sold for \($25\) per share. The firm’s debt is publicly traded at 95 percent of its face value of \($180\) million. The cost of debt is 10 percent and the cost of equity is 20 percent. What is the weighted
Calgary Industries, Inc., is considering a new project that costs \($25\) million. The project will generate after-tax (year-end) cash flows of \($7\) million for five years. The firm has a debt-to-equity ratio of 0.75. The cost of equity is 15 percent and the cost of debt is 9 percent. The
Suppose Garageband.com has a 28 percent cost of equity capital and a 10 percent beforetax cost of debt capital. The firm’s debt-to-equity ratio is 1.0. Garageband is interested in investing in a telecomm project that will cost \($1,000,000\) and will provide \($600,000\) pretax annual earnings
Ms. Sharp thinks that the distribution of rates of return on Q-mart stock is as follows.a. What is the expected return for the stock?b. What is the standard deviation of returns for the stock? State of Economy Depression Recession Normal Boom Probability of State Occurring Q-mart Stock Return (%)
Suppose you have invested only in two stocks, A and B. You expect that returns on the stocks depend on the following three states of economy, which are equally likely to happen.a. Calculate the expected return of each stock.b. Calculate the standard deviation of returns of each stock.c. Calculate
Mr. Henry can invest in Highbull stock or Slowbear stock. His projection of the returns on these two stocks is as follows:a. Calculate the expected return of each stock.b. Calculate the standard deviation of return of each stock.c. Calculate the covariance and correlation between the two stocks.
A portfolio consists of 120 shares of Atlas stock, which sells for \($50\) per share, and 150 shares of Babcock stock, which sells for \($20\) per share. What are the weights of the two stocks in this portfolio?
Security F has an expected return of 12 percent and a standard deviation of 9 percent per year. Security G has an expected return of 18 percent and a standard deviation of 25 percent per year.a. What is the expected return on a portfolio composed of 30 percent of security F and 70 percent of
Suppose Janet Smith holds 100 shares of Macrosoft stock and 300 shares of Intelligence stock. Macrosoft stock is currently sold at \($80\) per share, while Intelligence stock is sold at \($40.\) The expected return of Macrosoft stock is 15 percent, while that of Intelligence stock is 20 percent.
Consider the possible rates of return that you might obtain over the next year. You can invest in stock U or stock V.a. Determine the expected return, variance, and the standard deviation for stock U and stock V.b. Determine the covariance and correlation between the returns of stock U and stock
Suppose there are only two stocks in the world: stock A and stock B. The expected returns of these two stocks are 10 percent and 20 percent, while the standard deviations of the stocks are 5 percent and 15 percent, respectively. The correlation coefficient of the two stocks is zero.a. Calculate the
If a portfolio has a positive weight for each asset, can the expected return on the portfolio be greater than the return on the asset in the portfolio that has the highest return? Can the expected return on the portfolio be less that the return on the asset in the portfolio with the lowest return?
Miss Maple is considering two securities, A and B, and the relevant information is given below:a. Calculate the expected returns and standard deviations of the two securities.b. Suppose Miss Maple invested \($2,500\) in security A and \($3,500\) in security B. Calculate the expected return and
Assume there are N securities in the market. The expected return of every security is 10 percent. All securities also have the same variance of 0.0144. The covariance between any pair of securities is 0.0064.a. What are the expected return and variance of an equally weighted portfolio containing
Comment on the following quotation from a leading investment analyst.Stocks that move perfectly with the market have a beta of 1. Betas get higher as volatility goes up and lower as it goes down. Thus, Southern Co., a utility whose shares have traded close to \($12\) for most of the past three
William Shakespeare’s character Polonius in Hamlet says, “Neither a borrower nor a lender be.” Under the assumptions of the CAPM, what would be the composition of Polonius’s portfolio?
The Alpha firm makes pneumatic equipment. Its beta is 1.2. The market risk premium is 8.5 percent, and the current risk-free rate is 6 percent. What is the expected return for the Alpha firm?
Suppose the beta for the Ross Corporation is 0.80. The risk-free rate is 6 percent, and the market risk premium is 8.5 percent. What is the expected return for the Ross Corporation?
The risk-free rate is 8 percent. The beta for the Jordan Company is 1.5, and the expected return of the market is 15 percent. What is the expected return for the Jordan Company?
Suppose the market risk premium is 7.5 percent and the risk-free rate is 3.7 percent. The expected return of TriStar Textiles is 14.2 percent. What is the beta for TriStar Textiles?
Consider the following two stocks:Assume the CAPM holds. Based upon the CAPM, what is the return on the market? What is the risk-free rate? Beta Expected Return Murck Pharmaceutical 1.4 25% Pizer Drug Corp. 0.7 14%
A stock has a beta of 1.8. A security analyst who specializes in studying this stock expects its return to be 18 percent. Suppose the risk-free rate is 5 percent and the market risk premium is 8 percent. Is the analyst pessimistic or optimistic about this stock relative to the market’s
Showing 4300 - 4400
of 5445
First
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
Last
Step by Step Answers
Get 50% OFF
Claim Now
