John Hull, Fundamentals of Futures and Option Markets - Chap 5

e. If we evaluated at the same effective rate, the earlier payments would give the semiannual bond the higher value.

The fixed cost is assumed that Larry has discovered the other fixed cost incurred. The total investment is $800,000. The worst case scenario assumes that Larry got a total line of credit from the bank in the amount of $400,000 and invested $400,000 from other source. The Notes payable – short term and the long-term debt is (11.8 + 3.7) = 15.5 % from Table F in the handout. The Loan interest and payment per year is ($400,000 * 0.155)= $62,000. The Income data from Table F indicates that there is a 0.4% of all other expenses net out of the total sales which equals to $109,908 (5,700,666 gallons * $4.82 *0.4%) .

* With the event “March 20” – Dhawan will miss the original schedule. However, he still receive profit with 3 events analysed in Question 1: pay 50%, pay 30% and pay 20%. We will use the result of question 1 in the event “delay” – He will lose 225,528 INR .

no gain or loss shall be allowed and a gain would be applicable in this case. By adding money in the

The company has an agreement with a bank that allows the company to borrow the exact amount needed at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company will pay the bank all of the accrued interest on the loan and as much of the loan as possible while still retaining at least $50,000 in cash.

5. Compare and contrast selling Eurodollar futures and being a fixed rate payer in a swap as a risk management technique. Explain in detail.

13. Sunglass Hut purchases a pair of Tiffany sunglasses from a wholesaler for $180 and sells it for $300. If the wholesaler increases its price by 20%, to the nearest dollar, what should Sunglass Hut charge in order to maintain the same percent margin?

10. The current price of silver is $750. Storage costs are $8 per ounce per quarter payable in advance. The interest rate is 12% p.a. with continuous compounding. Calculate the futures price of silver for delivery in six months (to two decimal places).

Springfield Express has an opportunity to obtain a new route that would be traveled 20 times per month. The company believes it can sell seats at $ 175 on the route, but the load factor would be only 60 percent. Fixed cost would increase by $ 250,000 per month for additional personnel, additional passenger train cars, maintenance, and so on. Variable cost per passenger would remain at $ 70.

According to his financial model, the investment generates positive cash flow, excluding the initial investment, over the life of investment. This indicates further capital will not need to be raised for

= 299.629. Notice, that the value of the firm with debt overhang is lower than the same problem without debt overhang in part (e). (h) Suppose the firm were to hedge. Would equity holders take the gamble and what would be the value of the firm? (10 points) Answer: If the firm were to hedge by selling gold in a forward contract, it would get a sure cash flow of $350. Then it would not not take the gamble, because even if it lost, it could still make the debt payment of 250 · (1.05) = 262.5 and taxes of .4(50 − 250 · .05) = 15 (we assume the debt is safe, and therefore has a yield of 0.05, and verify that it can make the payment).

9. Suppose that Whirlpool finds a way to reduce the costs of the project by 5%. Please change the cost factor in cell G31 to 95%. What is the value of the option now?

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

* Determine the investment’s value without leverage, VU, by discounting its free cash flows at the

with 〖PV〗_l (t) = $4,999,516.42 (90% of totally used money), rl = 8%, and T-t = 23/365. This results in 〖FV〗_l (T) $5,024,783.10 which Jim has to pay back to the bank. The same formula can be applied to calculate the expected future value of the own funds with 〖FV〗_o (T) = $502,478.31 (it also assumes r = 8% interest). The underlying stock which Jim bought at t can be sold for S(T) at March 21st. As Jim bought the underlying he will also receive dividends worth $12,371.48. With regard to the short futures, Jim has to buy shares at S(T) which he then can sell at a price of $5,016,800.00 (see Figure 2).