Corporate Finance
3rd Edition
ISBN: 9780132992473
Author: Jonathan Berk, Peter DeMarzo
Publisher: Prentice Hall
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Textbook Question
Chapter 20.5, Problem 1CC
Is it ever optimal to exercise an American call on a non-dividend paying stock early?
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B) Common stock hasn’t term to maturity. How then can a stock that does not pay dividends have any value? Give an example of such firms listed in the domestic market of your country.
Explain carefully why Blacks approach to evaluating an American call option on a dividend-paying stock may give an approximate answer even when only one dividend is anticipated. Does the answer given by Blacks approach understate or overstate the true option value? Explain your answer.
d) Would you buy or sell this share? Why?
e) Explain the difference between common and preference stock holders
f) Suppose the country Morphosis operates in experiences a severe drought. What type of risk is this to the stockholders?
Chapter 20 Solutions
Corporate Finance
Ch. 20.1 - What is the difference between an American option...Ch. 20.1 - Does the holder of an option have to exercise it?Ch. 20.1 - Prob. 3CCCh. 20.2 - What is a straddle?Ch. 20.2 - Explain how you can use put options to create...Ch. 20.3 - Explain put-call parity.Ch. 20.3 - If a put option trades at a higher price from the...Ch. 20.4 - What is the intrinsic value of an option?Ch. 20.4 - Can a European option with a later exercise date...Ch. 20.4 - How does the volatility of a stock affect the...
Ch. 20.5 - Is it ever optimal to exercise an American call on...Ch. 20.5 - When might it be optimal to exercise an American...Ch. 20.5 - Prob. 3CCCh. 20.6 - Explain how equity can be viewed as a call option...Ch. 20.6 - Explain how debt can be viewed as an option...Ch. 20 - Explain the meanings of the following financial...Ch. 20 - What is the difference between a European option...Ch. 20 - Prob. 3PCh. 20 - Prob. 4PCh. 20 - Prob. 5PCh. 20 - You own a call option on Intuit stock with a...Ch. 20 - Assume that you have shorted the call option in...Ch. 20 - You own a put option on Ford stock with a strike...Ch. 20 - Assume that you have shorted the put option in...Ch. 20 - What position has more downside exposure: a short...Ch. 20 - Prob. 11PCh. 20 - You are long both a call and a put on the same...Ch. 20 - You are long two calls on the same share of stock...Ch. 20 - A forward contract is a contract to purchase an...Ch. 20 - You own a share of Costco stock. You are worried...Ch. 20 - Dynamic Energy Systems stock is currently trading...Ch. 20 - You happen to be checking the newspaper and notice...Ch. 20 - Prob. 20PCh. 20 - Prob. 21PCh. 20 - Prob. 22PCh. 20 - Prob. 23PCh. 20 - Prob. 24PCh. 20 - Prob. 25PCh. 20 - Prob. 26PCh. 20 - Prob. 27PCh. 20 - Prob. 28PCh. 20 - Prob. 30PCh. 20 - Prob. 31P
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- A firm’s preferred stock often sells at yields below its bonds because: Preferred stock generally carries a higher agency rating. Owners of preferred stock have a prior claim on the firm’s earnings. Owners of preferred stock have a prior claim on a firm’s assets in the event of liquidation. Corporations owning stock may exclude from income taxes most of the dividend income they receive. Which is the most risky transaction to undertake in the stock index option markets if the stock market is expected to increase substantially after the transaction is completed? Write a call option. Write a put option. Buy a call option. Buy a put optionarrow_forward. On the day an IPO comes out, the market pricecan rise above the offering price or fall below thatprice. Is it more common for the market price toclose above or below the offering price on the dayof an IPO? If a company’s market price rises abovethe IPO price, does that suggest that the companyleft money on the table and thus received less for its shares than it should have received? If mostcompanies do leave money on the table, does thatindicate the IPO market is inefficient? How mightsystematic underpricing be explained? Has theamount of underpricing been constant over time?Explain.arrow_forwardHow would you use the dividend yield model to value the price of a stock if it presently does not pay dividends but is expected to pay dividends in the futurearrow_forward
- Why might a stock dividend or a stock split be of limited value to an investor? What about a stock repurchase? Does it make sense for a corporation to repurchase its own stock?arrow_forwardIs the Black-Scholes-Merton options pricing model well suited to pricing an American call option on a dividend paying stock?arrow_forwardWhat is the relationship between the expected return of a stock and its fair expected return? When is a stock underpriced, overpriced, or fairly priced? Explain what happens to the firm’s cost of equity, cost of debt, and cost of capital when the firm increases the amount of debt in its capital structure. Assume all Modigliani and Miller assumptions hold and that there are no taxes. How can we use the internal rate of return to evaluate whether we should pursue a specific project? Should we pursue a project when the cost of capital is higher than the internal rate of return?arrow_forward
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