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A bond issued by Standard Oil worked as follows. The holder received no interest. At the bond’s maturity the company promised to pay $1,000 plus an additional amount based on the price of oil at that time. The additional amount was equal to the product of 170 and the excess (if any) of the price of a barrel of oil at maturity over $25. The maximum additional amount paid was $2,550 (which corresponds to a price of $40 per barrel). Show that the bond is a combination of a regular bond, a long position in call options on oil with a strike price of $25, and a short position in call options on oil with a strike price of $40.
The risk-free rate of return is 6.5%, the expected rate of return on the market portfolio is 13%, and the stock of Xyrong Corporation has a beta coefficient of 2.7. Xyrong pays out 50% of its earnings in dividends, and the latest earnings announced w..
Suppose that you are 25 years old. You figure that your income will be such that you will be able to save for the next 25 years, until age 50 (first deposit at age 26 and last deposit at age 50). At age 50, your income will just cover your expenses. ..
Lohn Corporation is expected to pay the following dividends over the next four years: $14, $10, $9, and $4.50. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends forever. If the required return on the stock is 10..
The spot price of a market index is $1,085. A 9-month forward contract on this index is priced at $1,170. What is the profit or loss to a short position if the spot price of the market index is $1,095 on the expiration date?
Great Lakes Clinic reported net income for 2014 of $3.6 million on total revenues of $55 million. Depreciation expenses totaled $3 million. What were the total expenses? What were the total cash expenses? What was the clinic's cash flow?
Grammy phone is a cellular firm that reported a net income of $50 million in the most recent financial year. The firm had $1 billion in debt, on which it reported interest expenses of $100 million in the most recent financial year. Assuming that ther..
By using dollar cost averaging
Two stocks each pay a $1 dividend that is growing annually at 8 percent. Stock A's beta = 1.3; stock B's beta = 0.8. Which stock is more volatile? If Treasury bills yield 9 percent and you expect the market to rise by 13 percent, what is your risk-ad..
A large retailer obtains merchandise under the credit terms of 1/15, net 45, but routinely takes 60 days to pay its bills. (Because the retailer is an important customer, suppliers allow the firm to stretch its credit terms.) What is the retailer's e..
Ideally a leading indicator of a variable of interest should be used as
Chalheim Sisters Inc. has always paid out all of its earnings as dividends, hence the firm has no retained earnings. This same situation is expected to persist in the future. The company uses the CAPM to calculate its cost of equity, its target capit..
John bought 100 stock of Ford for $8 per share a year ago. Today he decides to sell the stocks for $16 per share. During this year, John also received $0.20 dividend per share. What is the dividend yield on Ford stock? Which of the following securiti..
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