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Sunburn Sunscreen has a zero coupon bond issue outstanding with $20,000 face value that matures in one year. The current market value of the firm’s assets is $20,900. The standard deviation of the return on the firm’s assets is 26% per year, and the annual risk-free rate is 6% per year, compounded continuously.
b) Suppose the firm is considering two mutually exclusive investments. Project A has an NPV of $800, and Project B has an NPV of $1,300. As a result of taking Project A, the standard deviation of the return on the firm’s assets will increase to 50% per year. If Project B is taken, the standard deviation will fall to 23%. What is the value of the firm’s equity and debt if Project A is undertaken? If Project B is undertaken?
Ann Chovey has a homeowner’s policy with actual cash value coverage for personal property. Her four-year- old genuine imitation leather naugahyde sofa was ruined by an infestation of mice. It would cost $5,000 to replace the sofa. The sofa had an est..
You have $100,000 to invest in Stock D, Stock F, or a risk-free asset. You must invest all your money. Your goal is to create a portfolio that has an expected return of 11.4 percent. Assume D has an expected return of 14.9 percent, F has an expected ..
A project currently generates sales of $12 million, variable costs equal 40% of sales, and fixed costs are $2.4 million. The firm’s tax rate is 40%. Assume all sales and expenses are cash items. What are the effects on cash flow, if sales increase fr..
Equal principal payments are made on a loan of $1000 for 10 years. Interest is paid at the rate of 10% on the outstanding principal. The lender invests the payments (interest + principal) in a fund earning 5% interest. What yield rate does the invest..
Two competing companies have submitted bids to develop a new video display technology. The yearly development cost of Alpha expressed in actual dollars will be $150,000 the first year and increase by 5% per year over the five year contract.
Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4 percent of par. The bonds have a 5 percent coupon rate. What is the current yield on these bonds? Can you please show the steps?
A cash-or-nothing call pays $10 if the underlying asset price is above the strike at expiration and 0 otherwise. Price the call in terms of sigma, K, S0, r, and T under the Black-Scholes assumptions. An asset-or-nothing call delivers the underlying a..
Find the sample standard deviation for a security that has three one –year returns of 5%, 10%, and 15%. Which of the following type of firms are most likely to payout cash dividends? Payout policy refers to the decisions that firms make about whether..
A stock has a price of $31 and an annual return volatility of 59 percent. The risk-free rate is 3.03 percent. Calculate the call and put option prices with a strike price of $29 and a 90-day expiration. Calculate the deltas of the call and put
Write system of equations for the 2nd Markovitz problem: given n assets and correlations between them and given a sigma, find equations for weights of the portfolio which maximize the mean return with a given sigma. You need to use Lagrange multiplie..
Knight Supply Corp. has not grown for the past several years, and management expects this lack of growth to continue. The firm last paid a dividend of $4.30. If you require a rate of return of 17.0 percent, what is the current value of this stock to ..
What’s the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?
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