EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Textbook Question
Chapter 22, Problem 16P
You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. JCH stock currently trades for $25 per share. You can sell the shares of JCH that you will receive in the market at any time. But as part of the offer, JCH also agrees that at the end of the next year, it will buy the shares back from you for $25 per share if you desire. Suppose the current one-year risk-free rate is 6.18%, the volatility of JCH stock is 30%, and JCH does not pay dividends.
- a. Is this offer worth more than $25 million? Explain.
- b. What is the value of the offer?
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Answer:
You are thinking of pursuing an actuarial career, so you have agreed to serve as an intern at Love Actuaries LLP.
The managing partner, Karen Thompson, has asked you to do some quick calculations for her. She wants you to use the current yield curve, flat at 6%, in your calculations.
Client Annie Inc. has a pension plan that pays pension benefits annually at a rate of $10 million per year, starting one year from today. The pension obligation will end in 40 years. Karen wants to know the duration of these required pension payments.
Client Billy Mack Co. wants to immunize its pension obligations (present value = $150 million with a duration of 22 years) with two $1000 face value bonds. The first bond is a 7-year 5% annual coupon bond issued by Jaime Corp. The second bond issuer, Kari Ltd., has issued a consol bond paying a 10% annual coupon perpetually. Ms. Thompson wants you to calculate the money Billy Mack should allocate to each of these bonds to immunize its pension against…
You've just joined the investment banking firm of Dewey, Cheatum, and Howe. They've offered you two different salary arrangements: Arrangement 1: you can have $75,000 per year for the next two years, or Arrangement 2: you can have $64,000 per year for the next two years, along with a $20,000 signing bonus today. The bonus is paid immediately, and the salary is paid in equal amounts at the end of each month.
The interest rate is 10 percent compounded monthly.
a) What is the present value of Arrangement 1?
b) What is the present value of Arrangement 2?
c) Which arrangement do you prefer
Chapter 22 Solutions
EBK CORPORATE FINANCE
Ch. 22.1 - What is the difference between a real option and a...Ch. 22.1 - Why does a real option add value to an investment...Ch. 22.2 - Prob. 1CCCh. 22.2 - In what circumstances does the real option add...Ch. 22.2 - How do you use a decision tree to make the best...Ch. 22.3 - What is the economic trade-off between investing...Ch. 22.3 - Prob. 2CCCh. 22.3 - Does an option to invest have the same beta as the...Ch. 22.4 - Why can a firm with no ongoing projects, and...Ch. 22.4 - Why is it sometimes optimal to invest in stages?
Ch. 22.4 - How can an abandonment option add value to a...Ch. 22.5 - Prob. 1CCCh. 22.5 - Prob. 2CCCh. 22.6 - Why can staging investment decisions add value?Ch. 22.6 - How can you decide the order of investment in a...Ch. 22.7 - Prob. 1CCCh. 22.7 - Prob. 2CCCh. 22 - Your company is planning on opening an office in...Ch. 22 - You are trying to decide whether to make an...Ch. 22 - Prob. 4PCh. 22 - Prob. 5PCh. 22 - You are a financial analyst at Global Conglomerate...Ch. 22 - Prob. 7PCh. 22 - Prob. 8PCh. 22 - Consider again the electric car dealership in...Ch. 22 - Prob. 12PCh. 22 - Prob. 13PCh. 22 - You are an analyst working for Goldman Sachs, and...Ch. 22 - You own a small networking startup. You have just...Ch. 22 - An original silver dollar from the late eighteenth...Ch. 22 - What implicit assumption is made when managers use...Ch. 22 - Prob. 22PCh. 22 - Genenco is developing a new drug that will slow...Ch. 22 - Prob. 24PCh. 22 - Your firm is thinking of expanding. If you invest...Ch. 22 - Prob. 26PCh. 22 - Assume that the project in Example 22.5 pays an...
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