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In many instances, whether a cash flow occurs early or not is a decision of the issuer or holder of the derivative. One example of this is a callable bond, which is a bond that the issuing firm can buy back at a prespecified call price. Valuing a callable bond is complicated because the early call date is not known in advance-it depends on the future path followed by the underlying security. In these cases, it is necessary to compare the value of the security- assuming it is held a while longer-with the value obtained from cash by calling the bond or prematurely exercising the call option. To solve these problems, you must work backward in the binomial tree to make the appropriate comparisons and find the nodes in the tree where intermediate cash flows occur. Suppose that in the absence of a call, a callable corporate bond with a call price of $100 plus accrued interest has cash flows identical to those of the bond in exercise 7.3. (In this case, accrued interest is the $5 coupon if it is called cum-coupon at the intermediate date and 0 if it is called excoupon.) What is the optimal call policy of the issuing firm, assuming that the firm is trying to maximize shareholder wealth? What is the value of the callable bond?
Shao Industries is considering a proposed project for its capital budget. The company estimates that the project's NPV is $12 million. This estimate assumes that the economy and market conditions will be average over the next few years. What is the p..
What are the post-merger earnings per share? What is the maximum number of new shares that must be issued to Doodle stockholders? If Dipsy decides to pay $30 per share for Doodle, what would be the exchange ratio?
The firm yesterday paid a dividend of $7.80. You have projected that dividends will grow at a rate of 9.0% per year indefinitely. If you want an annual return of 24.0%, what is the most you should pay for the stock now?
One year ago a $1,000 face value, 6% coupon bond was selling for $1,100. Since then, the market yield has decreased by two percentage points. The bond pays interest semiannually and now has four years to maturity. What is the bond's price today?
What are averages if each price rises to $11, $17, and $35, respectively? c. What is the percentage increase in each average?
What is the value of Foggy's stock to an investor who requires a 16% rate of return?
What are the ethical implications of undertaking transactions expressly to temporarily hide how much money a firm has borrowed?
Develop data to test the logic of the inventory update program. The test data should allow for all possible combinations of master data and event data records.
What is the probability that a normal random variable is less than one standard deviation below its mean?
How will each option affect your balance sheet? How will each option affect your return on equity? If you finance completely through debt what might happen to the risk of your corporation from a bank's perspective?
w.f. bailey company had a quick ratio of 1.4 a current ratio of 3.0 an inventory turnover of 5x total current assets of
However, with the warrants attached the bonds will pay a 6% annual coupon and still sell for the face value of $1,000. What is the value of each warrant?
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