How do I solve this? $3.40 per share loss on the put.Thus,answer.(The call is out-of-the-money, is worthless,and you lose the entire premia.)Suppose that a share of Apple stock costs $25 today, the 1-year forward is $27 pershare, and the 1-year risk free rate is 10% (assume that you can both borrow andlend at the risk-free rate). What steps would be involved?a. Borrow $25, and buy a share of stockb. Short a share of stock, and invest the proceedsc. Sell the stock forwardd. Sell the stock forward and invest the proceedse. None of the above, or it can't be done

Arbitrage is the strategy applied by the investor to take the benefit of mispricing, at various…

Answered: What steps would be involved?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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.Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account. a.If you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: (i) $22; (ii) $20; (iii) $18? Assume that Xtel pays no dividends. b.If the maintenance margin is 25%, how high can Xtel’s price rise before you get a margin call? c.Redo parts (a) and (b), but now assume that Xtel also has paid a year-end dividend of $1 per share. The prices in part (a) should be interpreted as ex-dividend, that is, prices after the dividend has been paid.13.
Suppose that you sell short 1,000 shares of Xtel, currently selling for $20 per share, and give your broker $15,000 to establish your margin account. a. if you earn no interest on the funds in your margin account, what will be your rate of return after one year if Xtel stock is selling at: $22, $20, and $18? Assume that Xtel's pays no dividends. b. If the maintenance margin is 25%, how high can Xtel's price rise before you get a margin call? c. Redo parts a and b but now assume that Xtel has paid a year end dividend of $1 per share. The pruces in part a should be interpreted as ex-dividend, that is prices after the dividend has been paid.
Abel, Inc. just paid a dividend of $3.0 per share and you think they will continue to pay $3.0 per year indefinitely. If the appropriate discount rate is 11%, how much should the price of a share be? (Answer to the nearest penny.)
Suppose you have $60,000 to invest. You're considering Miller-Moore Equine Enterprises (MMEE), which is currently selling for $100 per share. You also notice that a call option with a strike price of $100 and six months to maturity is available. The premium is $5. MMEE pays no dividends. What is your annualized return from these two investments if, in six months, MMEE is selling for $106 per share? What about $96 per share?
Cede & Co. expects its EBIT to be $56,000 every year forever. The firm can borrow at 8 percent. The firm currently has no debt, its cost of equity is 12 percent, and the tax rate is 23 percent. Assume the firm borrows $155,000 and uses the proceeds to repurchase shares. a. What is the cost of equity after recapitalization? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
You have R40,000 to invest in Sophie Shoes, a stock selling for R80 a share. The initial margin requirement is 60 percent. Ignoring taxes and commissions, show in detail the impact on your rate of return if the stock rises to R100 a share and if it declines to R40 a share assuming: (a) you pay cash for the stock, and (b) you buy it using maximum leverage. 2. Lauren has a margin account and deposits R50,000. Assume the prevailing margin requirement is 40 percent, commissions are ignored, and the Gentry Wine Corporation is selling at R35 per share. a. How many shares can Lauren purchase using the maximum allowable margin? b. What is Lauren’s profit (loss) if the price of Gentry’s stock i. rises to R45? ii. falls to R25? c. If the maintenance margin is 30 percent, to what price can Gentry Wine fall before Lauren will receive a margin call? 3. Suppose you buy a round lot of Francesca Industries stock on 55 percent margin when the stock is selling at R20 a share. The broker charges a 10…
You have R40,000 to invest in Sophie Shoes, a stock selling for R80 a share. The initial margin requirement is 60 percent. Ignoring taxes and commissions, show in detail the impact on your rate of return if the stock rises to R100 a share and if it declines to R40 a share assuming: (a) you pay cash for the stock, and (b) you buy it using maximum leverage. 2. Lauren has a margin account and deposits R50,000. Assume the prevailing margin requirement is 40 percent, commissions are ignored, and the Gentry Wine Corporation is selling at R35 per share. How many shares can Lauren purchase using the maximum allowable margin? What is Lauren’s profit (loss) if the price of Gentry’s stock rises to R45? ii. falls to R25? If the maintenance margin is 30 percent, to what price can Gentry Wine fall before Lauren will receive a margin call? 3.Suppose you buy a round lot of Francesca Industries stock on 55 percent margin when the stock is selling…
Suppose that Kaka Plc currently is selling at $50 per share. You buy 900 shares using $22,050 of your own money, borrowing the remainder of the purchase price from your broker. The rate on the margin loan is 7%. Required If the maintenance margin is 20%, how low can Kaka Plc’s price fall before you get a margin call? (Round your answer to 2 decimal places.)
You have $40,000 to invest in a stock trading at $25 per share. Your brokerage firm has a 60% initial margin limit (which you fully use) and a 30% maintenance margin limit. You shorted the stock at $25 per share, but it rose in value to $28 per share. How much $$equity is in your account now? What is your percent gain/loss? Based on the information, at what price could you get a margin call (P*)?
Cede & Co. expects its EBIT to be $83,000 every year forever. The firm can borrow at 11 percent. The firm currently has no debt, and its cost of equity is 15 percent. a. If the tax rate is 25 percent, what is the value of the firm? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will the value be if the company borrows $144,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
You are about to purchase OSTK, which is currently trading at $20 per share. You have $5,000 of your own to invest. You borrow an additional $5,000 from your broker and invest $10,000 in the stock. How far does the stock price have to fall for you to get a margin call if the maintenance margin requirement is 35%?
Meyer & Co. expects its EBIT to be $115,000 every year forever. The firm can borrow at 7 percent. The company currently has no debt, and its cost of equity is 13 percent. a. If the tax rate is 24 percent, what is the value of the firm? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will the value be if the company borrows $255,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

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