9 The price of ABC stock is currently $42 per share, but in six months, you expect it to rise to $50. ABC does not paya dividend. You buy a six-month call on ABC, with a strike price of $45. The option cost $200 What holding periodreturn do you expect on this call? Ignore transaction costs and taxes.OA. 300%B. 200%OC. 150%OD. 250%COOO

The call option is an option which will increase in value due to the increase of market price. The…

Answered: The price of ABC stock is currently $42…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 5P

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The price of Outdoor Designs, Inc. is now 85. The company pays no dividends. Fred Gray expects the price four years from now to be 125 a share. Should Fred buy Outdoor Designs if he wants a 15 percent rate of return? Explain.
Crisp Cookware’s common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 0.8. The risk-free rate is 5.2%, and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe will be the stock’s price at the end of 3 years (i.e., what is )?
CALCULATING THE WACC Here is the condensed 2019 balance sheet for Skye Computer Company (in thousands of dollars): Skyes earnings per share last year were 3.20. The common stock sells for 55.00. last years dividend (D0) was 2.10, and a flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9%. Skyes preferred stock pays a dividend of 3.30 per share, and its preferred stock sells for 30.00 per share. The firms before-lax cost of debt is 10%, and its marginal tax rate is 25%. The firms currently outstanding 10% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skyes beta is 1.516. The firms total debt, which is the sum of the companys short-term debt and long-term debt, equals 1.2 million. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. b. Now calculate the cost of common equity from retained earnings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r1 and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) d. If Skye continues to use the same market-value capital structure, what is the firms WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock?
A speculator sells a stock short for $71 a share. The company pays a $2.50 annual cash dividend.After a year has passed, the seller covers the short position at $63. If the margin requirement is55 percent, what is the percentage return earned on the investment? Redo the calculations, assuming the price of the stock is $78 when the investor closes theposition. Based on your calculations to both scenarios, what generalization can be inferred?
Suppose the stock of Company J pays no dividends and has a current price of $90.00. The forward price for delivery in 1 year is $93.60, and the effective annual interest rate is 4%. What would be the profit on a short forward position if the stock price is $109.80 when the forward contract expires? a. $16.20 b $3.60 c $-16.20 d $19.80 e $-19.80
The price of Cilantro, Incorporated, stock will be either $84 or $106 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 4 percent. a. Suppose the current price of the company's stock is $95. What is the value of the call option if the exercise price is $80 per share? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose the
Carmax, Inc. common stock currently sells for $106.45 per share, and the standard deviation of returns is 44.91%. A call option with a strike price of $95.00 is currently trading on the market. The option expires in three months, and the risk-free rate of return is 2.6%. Carmax does not pay a dividend. Carmax's gamma (Γ) is: Group of answer choices 0.00391 0.01353 0.01526 0.01541
A stock sells for $15 per share. You purchase 100 shares for $15 a share (i.e., for $1,500), andafter a year the price rises to $18.75 a) What will be the percentage return on your investment ifyou bought the stock on margin and the margin requirement was 65 percent? (Ignore commissions, dividends, and interest expense.) b) Rather than selling for $18.75, determine the percentage return on your investment if the price of the stock falls to $12.30 Based on your answers to both questions, what generalization on the use of marginaccounts can be inferred?
The Bulldogs Inc.’s stock price is believe to decline from its current level of P125 anytime during the next 9 months. A 9-month put option for P975 is available to be purchased and it gives the buyer the right to sell 100 shares at a price of P130 per share. What would be the net profit if a 100-share contract is bought for P975 and Bulldogs Inc.’s stock price actually dropped to P90?

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