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Consider an option on a stock when the stock price is $41, the strike price is $40, the risk-free rate is 6%, the volatility is 35%, and the time to maturity is 1 year. Assume that a dividend of $0.50 is expected after 6 months.
(a) Use DerivaGem to value the option assuming it is a European call.
(b) Use DerivaGem to value the option assuming it is a European put.
(c) Verify that put-call parity holds.
(d) Explore using DerivaGem what happens to the price of the options as the time to maturity becomes very large. For this purpose, assume there are no dividends. Explain the results you get.
Delivery and installation of the new line are expected to cost an additional $100,000. Assuming Fleming's marginal tax rate is 40 percent, calculate the net investment for the new line.
Suppose that prior to a merger the stock price of the target company was $50 and the stock price of the acquiring company was $40. If the acquiring firm agrees to pay 1.5 share of their stock for every share of the target firms stock, then what premi..
A project has the following estimated data: price = $66 per unit; variable costs = $43 per unit; fixed costs = $16,500; required return = 8 percent; initial investment = $25,000; life = five years. What is the accounting break-even quantity? What is ..
Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $50,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 9%, and the loa..
The elasticity of demand is: Whether buyer or sellers pays more of a commodity tax depends on:
an investment portfolio contains stocks of a large number of corporations. over the last year the rates of return on
When weighted average cost of capital (WACC) is used to value a levered firm, the interest tax shield is:
Springfield Company has the following capital structure. It has 9 million shares of common stock selling for $80 each. The stock will pay a dividend of $2.75 next year and this dividend is expected to grow at the rate of 10% annually.
The interest rate is 6% per annum. - What is the project's NPV? - How does the value change if all cash flows will occur 1 year later?
What is present value of perpetuity of $100 per year with first payment started 5 years from today if appropriate discount rate is 5%? If discount rate is increased to 15% what is the present value of the perpetuity?
The capital asset pricing model approach to equity valuation:
In recent years, Lantana Enterprises has had a 40 percent dividend payout ratio and has generated a 6 percent profit margin. They would like to continue to maintain both of these while achieving a sustainable growth rate of 4.5 percent. Lantana has a..
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