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a. You expect that company A will pay its first dividend of $2 per share 3 years from today. After that the dividend is expected to grow at an annual rate of 5% for ever. The risk free rate is 6%, and the expected rate of return on the market is 10%. Also, the covariance between stock A and the market is 0.10, and standard deviation of the market portfolio is 20%. What is the fair value of the stock today?
b. Assume that the actual price is less than what you have calculated in part a. What does this say about its actual return compared to what is predicted by the security market line?
c. If it is true that properly priced securities fall on the security market line, what would you expect to happen to the price of stock A given that it is currently less than your calculation from part a? Explain why you believe that a price change would occur.
Prepare a WAC IO and PO tranche to give a 5.75% deal coupon. Create a PAC class (A-1) with an initial collar of 50%-200% PPC, assuming base case defaults.
You are an international shrimp trader. what is the value of this exchange to you?
The stocks of Microsoft and Apple have a correlation coefficient of 0.6. The variance of Microsoft stock is 0.4 and the variance of Apple stock is 0.3. What is the covariance between the two stocks?
For a Japanese bank, the option to sell 2 billion yen for 16 million USD on a date 18 months from today is worth 170 million yen. Volatility is 25%, and the continuously compounding interest rates are 3% in USD, and 1% in yen. What are the 2 billion ..
A hedge trades price risk for basis risk. Therefore, an understanding of what causes basis to be weak or strong is useful for understanding the outcome of hedges. In a corn market impacted by drought, basis would likely be strong. Likewise, suppose t..
Using arbitrage arguments, find upper and lower bounds for the forward price of the stock for a forward contract with maturity T >t.
How can you find the weights to be used for the WACC and which are more appropriate (market versus book)? What does WACC stand for and why is it important when dealing with the Cost of Capital?
You are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 21 million. The cash flows from the project would be SF 5.9 million per year for the next five years. The dollar required ..
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Suppose the Federal Reserve purchases $10 billion worth of foreign currency in exchange for deposit accounts at the Federal Reserve. Show the changes that result from this transaction on the Fed's balance sheet.
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Harrison Co. issued 16-year bonds one year ago at a coupon rate of 7.2 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.5 percent, what is the current dollar price assuming a $1,000 par value?
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