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ABC Corp. is considering expansion of its production capacity by investing in a project with the following unlevered cash flows (UCF):
Year 0: -$20 million
Year 1: +$5 million
Year 2: +$8 million
Year 3 and all future years: +$10 million
ABC Corp. will finance this expansion both with internal cash and by selling $10 million in bonds. The bonds pay interest of 10%. The expected return on ABC's stock is 20% and firm is expected to maintain a debt-equity ratio of 1 for the foreseeable future. The corporate income tax rate is 20%. Ignoring the costs of financial distress and issue costs, calculate the net present value of this project using the Flow-To-Equity (FTE) approach.
A put option is currently selling for $7.5. It has a strike price of $85 and seven months to maturity. The current stock price is $88. The risk-free rate is 6 percent, and the stock will pay a $2.9 dividend in two months. What is the price of a call ..
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