Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Question
Chapter 21, Problem 14PS
a)
Summary Introduction
To determine: Value of American call option and company pays dividend of $25 at the end of first 6 months.
b)
Summary Introduction
To determine: Value of European option.
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The FI Corporation’s dividends per share are expected to grow indefinitely by 8% per year.
Required:
If this year’s year-end dividend is $3.00 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM?
Note: Round your answer to 2 decimal places.
If the expected earnings per share are $9.00, what is the implied value of the ROE on future investment opportunities?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
How much is the market paying per share for growth opportunities (i.e., for an ROE on future investments that exceeds the market capitalization rate)?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
Suppose XYZ stock pays no dividends and has a current price of $50. The forward price for delivery in 1 year is $55. Suppose the 1-year eective annual interest rate is 10%.
(a) Graph the payo and prot diagrams for a forward contract on XYZ stock with a forward price of $55.
(b) Is there any advantage to investing in the stock or the forward contract? Why?
(c) Suppose XYZ paid a dividend of $2 per year and everything else stayed the same.
Now is there any advantage to investing in the stock or the forward contract?
Why?
2.
Preferred Products has issued preferred stock with an $8 annual dividend that will be paid in perpetuity.
a. If the discount rate is 12%, at what price should the preferred sell? (Round your answer to the nearest cent.)
b. At what price should the stock sell one year from now? (Round your answer to the nearest cent.)
c. What is the dividend yield, the capital gains yield, and the expected rate of return of the stock? (Round your answer to the nearest whole number. If no entry is required, please, enter zero ("0").)
Chapter 21 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 21 - Prob. 1PSCh. 21 - Option delta a. Can the delta of a call option be...Ch. 21 - Prob. 4PSCh. 21 - Binomial model Over the coming year, Ragworts...Ch. 21 - BlackScholes model Use the BlackScholes formula to...Ch. 21 - Option risk A call option is always riskier than...Ch. 21 - Prob. 8PSCh. 21 - Prob. 9PSCh. 21 - Binomial model Suppose a stock price can go up by...Ch. 21 - American options The price of Moria Mining stock...
Ch. 21 - Prob. 12PSCh. 21 - American options Suppose that you own an American...Ch. 21 - Prob. 14PSCh. 21 - Prob. 15PSCh. 21 - American options The current price of the stock of...Ch. 21 - Option delta Suppose you construct an option hedge...Ch. 21 - Prob. 19PSCh. 21 - American options Other things equal, which of...Ch. 21 - Option exercise Is it better to exercise a call...Ch. 21 - Prob. 22PSCh. 21 - Option delta Use the put-call parity formula (see...Ch. 21 - Option delta Show how the option delta changes as...Ch. 21 - Dividends Your company has just awarded you a...Ch. 21 - Prob. 27PSCh. 21 - Prob. 28PSCh. 21 - Prob. 29PS
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- Arondale Aeronautics has perpetual preferred stock outstanding with a par value of $100. The stock pays a quarterly dividend of $3, and its current price is $100. A. What is its nominal annual rate of return? Do not round your intermediate calculations. Round your answer to two decimal places. B. What is its effective annual rate of return? Do not round your intermediate calculations. Round your answer to two decimal places.arrow_forwardSteady As She Goes Inc. will pay a year-end dividend of $2.30 per share. Investors expect the dividend to grow at a rate of 6% indefinitely. a. If the stock currently sells for $23.00 per share, what is the expected rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. If the expected rate of return on the stock is 18.50%, what is the stock price? (Do not round intermediate calculations. Enter your answers rounded to 2 decimal places.)arrow_forwardAssume that the current stock price is 100 on a non-dividend paying stock, and the quoted three month American strike price is 60. One year interest rate 4%. is there any possibility for the early exercise if yes then would you exercise and if you wish to exercise how much many you will make? if early exercise is not possible then why?arrow_forward
- Preferred Products has issued preferred stock with an annual dividend of $6.50 that will be paid in perpetuity. a. If the discount rate is 10%, at what price should the preferred sell? (Round your answer to 2 decimal places.) b. At what price should the stock sell 1 year from now? (Round your answer to 2 decimal places.) c. What are the (i) the dividend yield; (ii) the capital gains yield; (iii) the expected rate of return of the stock? (Enter your answers as a whole percent.)arrow_forwardAn investor who wishes to purchase the stock belonging to Entity A to hold for two years will receive a dividend of $ 0.7 per share for the first year, $ 1.3 for the second year from this investment, and at the end of the second He estimates that it can be sold for $ 12.0 USD. What is the real value of the stock if the minimum rate of return expected by the investor is 20%? a) 15b) 2.81c) 9.81d) 21.81e) 5.81 ============= If the discount rate is 9%, what is the present value of 5375 USD received at the end of each year for 12 years?a) 25000,375b) 10000,5c) 12450,5d) 15500,375e) 38490,375 ============== The price / earnings ratio of the beta company stock has been calculated as 7.4. If the expected earnings per share of this stock for the next year is 2.5 USD, what is the real value of the stock? If the stock of this company is currently trading at 25 USD, can the relevant stock be purchased? a) 18.5 and should not be boughtb) 36 and must be purchasedc) 45 and must be purchased d) 18.5…arrow_forwardWhat is the lower bound for the price of a 7-month European call option on a dividend-paying stock when the stock price is $38.3, the strike price is $40, the risk-free interest rate is 1.1% per annum, and the stock is expected to pay a dividend of $2.56 in three months? Report your answer in dollars and cents.arrow_forward
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