You are the CEO of Acquifix, a company that wants to acquire a controlling interest (that...

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You are the CEO of Acquifix, a company that wants to acquire a controlling interest (that is, over 50 per cent of the stock) in Vic-Time, an underperforming company. This will involve you buying 100,000 units of stock in Vic-Time. Today is May 1. You cannot acquire any stock in Vic-Time until the start of June when a golden share in Vic-Time lapses. You plan to act as soon possible and buy the stock on June 1. You are, however, concerned that the market will move against you between now and June and want to hold down the cost of acquiring Vic-Time. The stock has a current price of $30. You will need to acquire 100,000 units of stock (shares) to obtain a controlling interest. The S&P 500 June futures contract is at 1,300. Each futures contract point is worth $250 (the money multiplier). Vic-Time stock's beta is 1.80. i) Detail the transaction that you need to undertake today, May 1, to fulfil your objective. (You may find a diagram helpful here-but it is not required.) ii) What will be the total cost of purchasing Vic-Time's stock if at June 1, the stock price and the index are: Stock: $32 Stock: $28 Index: 1352 Index: 1248 You are the CEO of Acquifix, a company that wants to acquire a controlling interest (that is, over 50 per cent of the stock) in Vic-Time, an underperforming company. This will involve you buying 100,000 units of stock in Vic-Time. Today is May 1. You cannot acquire any stock in Vic-Time until the start of June when a golden share in Vic-Time lapses. You plan to act as soon possible and buy the stock on June 1. You are, however, concerned that the market will move against you between now and June and want to hold down the cost of acquiring Vic-Time. The stock has a current price of $30. You will need to acquire 100,000 units of stock (shares) to obtain a controlling interest. The S&P 500 June futures contract is at 1,300. Each futures contract point is worth $250 (the money multiplier). Vic-Time stock's beta is 1.80. i) Detail the transaction that you need to undertake today, May 1, to fulfil your objective. (You may find a diagram helpful here-but it is not required.) ii) What will be the total cost of purchasing Vic-Time's stock if at June 1, the stock price and the index are: Stock: $32 Stock: $28 Index: 1352 Index: 1248

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ANSWER i To hedge against potential market movements and hold down the cost of acquiring VicTime you ... View the full answer