# Last Sale Net Bid Ask Open Int Puts Last Sale Net bid Ask Vol Open Int 16Aug 155.00(1619H155-E) 6.45 0.75

## Question:

Last Sale | Net | Bid | Ask | Open Int | Puts | Last Sale | Net | bid | Ask | Vol | Open Int | |

16Aug 155.00(1619H155-E) | 6.45 | 0.75 | 6.95 | 7.25 | 9 | 16Aug 155.00(1619T155-E) | 1.18 | (0.75) | 1.17 | 1.25 | 61 | 4505 |

16Aug 166.00(1619H160-E) | 3.3 | 0.85 | 3.15 | 3.3 | 101 | 16Aug 166.00(1619T160-E) | 2.76 | (1.24) | 2.71 | 2.84 | 61 | 2114 |

16Aug 165.00(1619H165-E) | 1.05 | 0.3 | 0.96 | 1.06 | 178 | 16Aug 165.00(1619T165-E) | 7.1 | (0.4) | 5.7 | 5.9 | 1 | 332 |

16Aug 170.00(1619H170_E) | 0.21 | (0.01) | 0.21 | 0.27 | 20 | 16Aug 170.00(1619T170_E) | 12.25 | 0 | 9.95 | 10.3 | 0 | 393 |

16Sep 155.00(1616I155-E) | 7.77 | 1.58 | 7.5 | 7.7 | 2 | 16Sep 155.00(1616U155-E) | 2.34 | (0.59) | 2.13 | 2.22 | 3 | 251 |

16Sep 160.00(1616I160-E) | 4.05 | 0.76 | 4 | 4.2 | 6 | 16Sep 160.00(1616U160-E) | 4 | (1.09) | 3.8 | 4 | 1 | 476 |

16Sep 165.00(1616I165-E) | 1.87 | 0.47 | 1.76 | 1.88 | 161 | 16Sep 165.00(1616U165-E) | 6.65 | (2.1) | 6.55 | 6.75 | 1 | 27 |

16Sep 170.00(1616I170-E) | 0.65 | 0.07 | 0.63 | 0.71 | 2 | 16Sep 170.00(1616U170-E) | 12.35 | 0 | 10.4 | 10.7 | 0 | 47 |

See the option quote on IBM from the CBOE website above. IBM (INTL BUSINESS MATCHING)

- Which option contract had the most trades today?
- Which option contract is being held the most overall?
- Suppose you purchase one option with symbol 1616I155-E. How much will you need to pay your broker for the option ( ignoring commissions)?
- Suppose you sell one option with symbol 1619H165-E.How much will you receive for the option(ignoring commissions)?
- The calls with which strike prices are currently in the money? Which puts are in the money?

6. You own a share of Costco stock. You are worried that its price will fall and would like to insure yourself against this possibility. How can you purchase insurance against a fall in the price of the stock?

7. What is the maximum payoff that a long put option can have? How about a long call option?

11. The current price of Estelle Corporation stock is $25. Its stock price either go up by 20% or go down by 20% in one year. The stock pays no dividends. The one year risk free interest rate is 6%. Using the binomial model, calculate the price of a one year call option on Estelle stock with a strike price of $25.

12.Using the information in Problem 11, use the binomial model to calculate the price of a one year put option in Estelle stock with a strike price of $25.

13. Dynamic Energy Systems stock is currently trading for $33 per share. The stock pays no dividends. A one year European put option on Dynamic with a strike price of $35 is currently trading for $2.10. If the risk free interest rate is 10% per year. What is the price of a one year European call option on Dynamic with a strike price of $35?

14.You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price of Intrawest is $20 per share and the one year, risk free interest rate is 8%. A one year put on Intrawest with a strike price of $18 sells for $3.33, while the identical call sells for $7. Explain what you must do to exploit this arbitrage opportunity?

- You have started a company and are in luck-a venture capitalist has offered to invest. You own 100% of the company with 5 million shares. The VC offers $1 million for 800,000 new shares.

- What is the implied price per share?
- What is the post-money valuation?
- What fraction of the firm will you own after the investment?

- Starware Software was founded last year to develop software for gaming applications. The founder initially invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified a venture capitalist who is interested in investing. This venture capitalist will invest $1 million and wants to own 2% of the company after the investment is completed.

- How many shares must the venture capitalist receive to end up with 20%of the company? What is the implied price per share of this funding round?
- What will the value of the whole firm be after this investment ( the post-money valuation)?

7 Roundtree Software is going public using an auction IPO. The firm has received the following bids:

Price(S) | Number of shares |

14.00 | 100,000 |

13.80 | 200,000 |

13.60 | 500,000 |

13.40 | 1,000,000 |

13.20 | 1,200,000 |

13.00 | 800,000 |

12.8- | 400,000 |

Assuming Roundtree would like to sell 1.8 million shares in its IPO, what will be the winning auction offer price?

10. Your investment bankers price your IPO at $15 per share for 10 million shares. If the price at the end of the first day of trading is 417 per share,

- What was the percentage return on the first day of trading?
- How much money did the firm miss out on due to underpricing?

15. Your firm is selling 3 million shares in an IPO. You are trading an offer price of $17.25 per share. Your underwriters have proposed a spread f 7% but you would like to lower it to 5%. However, you are concerned that if you do so, they will argue for a lower offer price. Given the potential savings from a lower spread, how much lower can the offer price go before you would have preferred to pay 7% to get $17.25 per share?

20. On January 20, Metropolitan, Inc. sold 8 million shares of stock in an SEO. The market price of Metropolitan at the time was $42.50 per share. Of the 8 million shares sold, 5 million shares were primary shares being sold by the venture capital investors. Assume the underwriter charges 5 % of the gross proceeds as an underwriting fee.

- How much money did Metropolitan raise?
- How much money did the venture capitalists receive?
- If the stock price dropped 3 % on announcement of the SEO and the new shares were sold at that price, how much money would Metropolitan receive?

22. MacKenzie Corporation currently has 10 million shares of stock outstanding at a price of $40 per shares. The company would like to raise money and has announced a rights issue. Every existing shareholder will be sent on right per share of stock that he or she owns. The company plans to require 10 rights to purchase one share at price of $40 per share How much will it raise id all rights are exercised?

- Your firm is considering two one year loan options for a $ 500,000 loan. The first carries fee of 2 % of the loan amount and charges interest of 4% of the loan amount. The other carries fee of 1 % of the loan amount and charges interest of 4.5 % of the loan amount.

- What is the net amount of funds from each loan?
- Based on the net amount of funds, what is the true interest rate of each loan?

- Your firm is issuing $100 million in straight bonds at par with a coupon rate of 6 % and paying total fees of 3 %. What is the net amount funds that the debt issue will provide for your firm?

7. Describe the prepayment risk in a mortgage-backed bond guaranteed by the CMHC.

11. You own a bond with a face value of $10,000 and a conversion ratio of 450. What is the conversion price?

12. A $1000 face value convertible bond has a conversion rate of 40 and is about to mature. Ignoring any transaction cost, what price must the stock surpass in order for you to convert?

13. You are the CFO of RealNetworks on July 1,2008. The company’s stock price is $9.70 and its convertible debt( as shown in Table 15.8) is now callable.

Table 15.8

Convertible Subordinated Notes | |

Issues under U>S SEC Rule 144A | |

Aggregate principal amount | 100 million |

Process net of offering costs | 97.0 million |

Coupon | 0% |

Conversion ratio | 107.5650 shares per $1000 principal amount |

Call date | July 1, 2008 |

Call price | 100% |

Maturity | July 1, 2010 |

- What is the value of the shares the bondholders would per $1000 they convert?
- What is the value per $1000 bond they would receive under the call?
- If you call the bonds, will the bondholders convert into shares or accept the call price?

- Consider a project with free cash flows in one year of either $130,000 or $180,000 with either outcome being equally likely. The initial investment required for the project is $100,000, and the project cost of capital is 20%. The risk free interest rate is 10%

- What is the NPV of this project?
- Suppose that to raise the funds for the investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this way-that is, what is the initial market value of the unlevered equity?
- Suppose the initial$100,000 is instead raised by borrowing at the risk free interest rate. What are the cash flows of the levered equity, and what is its initial value according to M&M?

- You are an entrepreneur starting a biotechnology firm. If your research is successful, the technology can be sold for $30 million. If your research is unsuccessful, it will be worth nothing. To fund your research, you need to raise $2 million. Investors are willing to provide you with $2 million in initial capital in exchange for 50% of the unlevered equity in the firm.

- What is the initial market value of the firm without leverage?
- Suppose you borrow $1 million. According to M%M, what fraction of the firm’s equity will you need to sell to raise the additional $1 million you need?
- What is the value of your share of the firm’s equity in case(a) and (b)?

- Hardmon Enterprises is currently an all equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.

- Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 6%. What will the expected return of equity be after this transaction?
- Suppose instead Hardmon borrows to the point that its debt equity ratio is 1.50.

With this amount of debt, Hardmon’s debt will be much riskier. As a result, the debt cost of capital will be 8%, What will the expected return of equity be in this case?

- A senior manager argues that it is the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this arhument?

9. Pelamed Pharmaceuticals had EBIT of $325 million in 2006, interest expenses of $125 million, and a corporate tax rate of 40%.

- What was pelamed’s 2006 net income?
- What was the total of Pelamed’s 2006 net income and interest payments?
- If Pelamed had no interest expenses, what would its 2006 net income have been? How does it compare to your answer in part(b)?
- What was the amount of Pelamed’s interest tax shield in 2006?

15. Amell Industries has 10 million in permanent debt outstanding. The firm will pay interest only this debt. Arnell’s marginal tax rate is expexted to be 35% for the foreseeable future.

- Suppose Arnell pays interest of 6% per year on its debt. What is its annual interest tax shield?
- What is the present value of the interest tax shield, assuming its risk is the same as the loan?
- Suppose instead that the interest rate on the debt is 5%. What is the present value of the interest tax shield in this case?

20. NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 15%. Suppose NatNah decides to increase its leverage and maintain a market debt-to-value ratio of 0.5. Suppose its debt cost of capital is 9% and its corporate tax rate is 35%. If NatNah’s pre tax WACC remains constant, what will its ( effective after tax) WACC be with the increase in leverage?

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