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A European call option and put option on a stock both have a strike price of $20 and an expiration date in three months. Both sell for $3. The risk-free interest rate is 10% per annum, the current stock price is $19, and a $1 dividend is expected in one month. Is there an arbitrage opportunity? If there is an arbitrage opportunity, clearly state what condition must be satisfied to eliminate the arbitrage opportunity. What is the strategy followed to make a profit from the arbitrage opportunity? What is the profit expressed as a present value?
Suppose you know that a company’s stock currently sells for $50 per share and the required return on the stock is 10 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it..
A Treasury bond with the longest maturity (30 years) has an ask price quoted at 98:09. The coupon rate is 3.80 percent, paid semi-annually. What is the yield to maturity of this bond?
Here is a scenario for you to ponder. You are in a healthy position as far as your finances are concerned and your cousin approaches you for a favor. Before you do you want to understand how liquid your cousins firms assets arwe is at this point. Whi..
A stockbroker has proposed two investments in lowrated corporate bonds paying high interest rates and selling at steep discounts (junk bonds). The bonds are rated as equally risky and both mature in 15 years. Construct a choice table for interest rat..
What is the present value of a $1,000 par corporate bond from the Burns Corp. with an annual coupon rate of 10% and 30 years to maturity when market rates on similar bonds are 8%? Assume annual coupons.
In some instances, when a depository institution borrower cannot make the promised principal and interest payment on a loan, the bank will extend another loan for the customer to make the payment. a. Is the first loan classified as a nonperforming lo..
Why do community banks not want Walmart to be in the banking business? What are the possible benefits to Walmart of such a move? What drawbacks do community bankers anticipate if Walmart is allowed to operate a full- scale bank in the United States?
Consider an asset that costs $511,000 and is depreciated straight-line to zero over its seven-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can be sold for $168,000. If the relevant tax rate is 34..
The tax basis of property acquired in a like-kind exchange must be allocated between land and improvements: a. in the same ratio as used by the previous owner. b. in a ratio that reflects relative market values of land and improvements at the time of..
A decrease in ________ would increase net working capital. In general, the greater a firm's reliance upon short-term debt or current liabilities, the lower the: Within the context of working capital management:
Schalheim 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 capi..
NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.57 a share. The following dividends will be $0.62, $0.77, and $1.07 a share annually for the following three years, respec..
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