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Suppose that the result of a major lawsuit affecting a company is due to be announced tomorrow. The company's stock price is currently $60. If the ruling is favorable to the company, the stock price is expected to jump to $75. If it is unfavorable, the stock is expected to jump to $50. What is the risk-neutral probability of a favorable ruling?
Assume that the volatility of the company's stock will be 25% for 6 months after the ruling if the ruling is favorable and 40% if it is unfavorable.
Use DerivaGem to calculate the relationship between implied volatility and strike price for 6-month European options on the company today.
The company does not pay dividends. Assume that the 6-month risk-free rate is 6%. Consider call options with strike prices of $30, $40, $50, $60, $70, and $80.
Falling Forest Products LLC will end 2014 with a net profit before tax of $400,000. The company is subject to a 40% federal plus state income tax rate, and has 100,000 shares of cumulative preferred stock that normally pay 40 cents per share per year..
During February 2016, John Smith financed the purchase of his new home by borrowing $250,000 from the Bank of America (BA). Although he was offered a conventional 30-year loan at a fixed rate of 5.4 percent, Mr. Smith chose BA's “5/30” variable rate ..
The December 31, 2013, balance sheet of Schism, Inc., showed long-term debt of $1,465,000, $153,000 in the common stock account and $2,780,000 in the additional paid-in surplus account. What was the firm’s operating cash flow during 2014?
You are paying an effective annual rate of 15.80 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on your account? How would you set this up and figure it out?
If velocity were constant at 2 while M2 rose from $5 trillion to $6 trillion in a single year, what would happen to nominal GDP?
Sky Enterprises outstanding bonds have a 25 year maturity and a $1000 par value. Their yield to aturity is 9.25%. They pay coupon payments semiannuallym and they are selling at a price of $850. What is the bond's(annual) coupon rate?
Calculate the difference between the future value of an investment compounded at a daily rate and the future value of an investment compounded at an annual rate, given the following data: (a) Present Value: $125,670, (b) Interest Rate: 6.5%, and (c) ..
You are purchasing a bond with face value 1000 a coupon rate 12% paid semi annually and a maturity of 15 years. Investors are seeing 10% yield to maturity. What must you pay for it today? You own a physical therapy clinic and come upon some exercise ..
Real Risk-Free Rate You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.8%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums:
If interest rates increase 3 percent and the average duration of a bank’s $100 million of assets is 4 years, the value of those assets will fall:
Explain the use of IRR and cash multiples as alternative valuation metrics, and discuss the drawbacks of those methods. In your answer, include how sensitivity analysis affects the evaluation process.
Difference between higher and lower cost financing. Corporations can achieve a lower cost of financing when their bonds are rated highly and a higher cost of financing when their bonds are low rated
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