Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 24, Problem 17QP
Intuition and Option Value [LO2] Suppose a share of stock sells for $59. The risk-free rate is 5 percent, and the stock price in one year will be either $65 or $75.
a. What is the value of a call option with an exercise price of $65?
b. What’s wrong here? What would you do?
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Consider two stocks:Stocks Current Price Possible Prices after one yearStock ABC $12.00 ABC + = $13.60 ABC – = $11.20Stock XYZ. $10.00 ABC + = $11.75 ABC – = $8.80Assume a risk-free borrowing and lending rate is 5.20% and that neither stockpays dividends, and fractional shares can be bought and sold.
Question:
1. Do you see that there opportunity to profit in this case? If so, how can that opportunity be realized? Explain your answer
2. Suppose that you are to buy at the current price, through borrowing,1000 shares of stock ABC, and sell it short. This allows you to buy stock XYZ. You also see an opportunity to engage in the bonds market risk-free2.a Do you think you can gain profit from this decision? 2.b If so, by how much? Show complete solution to justify your answerbased on higher and a lower price after one year, for both stocks.
Consider two stocks:
Stocks
Current Price
Possible Prices after one year
Stock ABC
$12.00
ABC + = $13.60
ABC – = $11.20
Stock XYZ
$10.00
ABC + = $11.75
ABC – = $8.80
Assume a risk-free borrowing and lending rate is 5.20% and that neither stock pays dicidends, and a fractional shares can be bought and sold.
Question:
1. Do you see that there opportunity to profit in this case? If so, how can that opportunity be realized? Explain your answer
2. Suppose that you are to buy at the current price, through borrowing,1000 shares of stock ABC, and sell it short. This allows you to buy stock XYZ. You also see an opportunity to engage in the bonds market risk-free2.a Do you think you can gain profit from this decision? 2.b If so, by how much? Show complete solution to justify your answerbased on higher and a lower price after one year, for both stocks.
Chapter 24 Solutions
Fundamentals of Corporate Finance
Ch. 24.1 - What is a call option? A put option?Ch. 24.1 - If you thought that a stock was going to drop...Ch. 24.2 - What is the value of a call option at expiration?Ch. 24.2 - What are the upper and lower bounds on the value...Ch. 24.2 - Prob. 24.2CCQCh. 24.3 - Prob. 24.3ACQCh. 24.3 - Prob. 24.3BCQCh. 24.3 - Prob. 24.3CCQCh. 24.4 - Prob. 24.4ACQCh. 24.4 - Prob. 24.4BCQ
Ch. 24.5 - Why do we say that the equity in a leveraged firm...Ch. 24.5 - All other things being the same, would the...Ch. 24.6 - Prob. 24.6ACQCh. 24.6 - Prob. 24.6BCQCh. 24.6 - Prob. 24.6CCQCh. 24.7 - Prob. 24.7ACQCh. 24.7 - Prob. 24.7BCQCh. 24.7 - Prob. 24.7CCQCh. 24.7 - Prob. 24.7DCQCh. 24 - Steve sold a put option when the option premium...Ch. 24 - Prob. 24.2CTFCh. 24 - Prob. 24.4CTFCh. 24 - Prob. 1CRCTCh. 24 - Prob. 2CRCTCh. 24 - Prob. 3CRCTCh. 24 - Prob. 4CRCTCh. 24 - Prob. 5CRCTCh. 24 - Options and Stock Risk [LO2] If the risk of a...Ch. 24 - Prob. 7CRCTCh. 24 - Prob. 8CRCTCh. 24 - Prob. 9CRCTCh. 24 - Prob. 10CRCTCh. 24 - Prob. 11CRCTCh. 24 - Prob. 12CRCTCh. 24 - Prob. 13CRCTCh. 24 - Prob. 14CRCTCh. 24 - Prob. 15CRCTCh. 24 - Calculating Option Values [LO2] T-bills currently...Ch. 24 - Understanding Option Quotes [LO1] Use the option...Ch. 24 - Calculating Payoffs [LO1] Use the option quote...Ch. 24 - Calculating Option Values [LO2] The price of Build...Ch. 24 - Calculating Option Values [LO2] The price of...Ch. 24 - Using the Pricing Equation [LO2] A one-year call...Ch. 24 - Equity as an Option [LO4] Rackin Pinion...Ch. 24 - Equity as an Option [LO4] Buckeye Industries has...Ch. 24 - Calculating Conversion Value [LO6] A 1,000 par...Ch. 24 - Convertible Bonds [LO6] The following facts apply...Ch. 24 - Calculating Values for Convertibles [LO6] You have...Ch. 24 - Calculating Warrant Values [LO6] A bond with 20...Ch. 24 - Prob. 13QPCh. 24 - Prob. 14QPCh. 24 - Prob. 15QPCh. 24 - Prob. 16QPCh. 24 - Intuition and Option Value [LO2] Suppose a share...Ch. 24 - Intuition and Convertibles [LO6] Which of the...Ch. 24 - Convertible Calculations [LO6] Starset, Inc., has...Ch. 24 - Abandonment Decisions [LO5] Allied Products, Inc.,...Ch. 24 - Pricing Convertibles [LO6] You have been hired to...Ch. 24 - Abandonment Decisions [LO5] Consider the following...Ch. 24 - SS Airs Convertible Bond SS Air is preparing its...Ch. 24 - Prob. 2MCh. 24 - Prob. 3MCh. 24 - Prob. 4MCh. 24 - Prob. 5M
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- You are considering an investment that will pay you $20,000 in two years and $40,000 in four years. If investors require a return of 11%, what price should it sell for? Question 7 options: 48,681 42,582 40,668 38,344 46,821arrow_forwardQ5. You are considering two investment choices: a. 1 year CD that pays 2% for sure; b. investing in SP500 with 8% expected and 20% stdev. Q5a. If you put 50% in each of the two, what in the mean and stdev for your portfolio return? Q5b. You want to maximize your expected return for the portfolio, as long as the stdev risk is no more than 10% per year. What is the allocation to CD and to stocks? What is the mean return of the portfolio? Q5c. You want to reach 17% mean return per year as a minimum. What is the least amount you need to allocate to stocks? What is the stdev of the portfolio?Q6. In addition to two instruments in Q5, you also can invest in a long term bond with 4% mean return and 10% stdev annually. Stock and bond funds have a correlation of -0.4 (negative 0.4). Q6a. What is the mean return and stdev for a portfolio that is 50% in stock and 50% in bond? Q6b. What is the mean return and stdev for a portfolio that is 25% in stock and 25% in bond and 50% in 1 year CD? Q6c. What…arrow_forwardH2. Suppose that a stock price is currently 70 dollars, and it is known that at the end of each of the next two six-month periods, the price will be either 17 percent higher or 17 percent lower than at the beginning of the period. Find the value of an American put option on the stock that expires a year from now, and has a strike price of 76 dollars. Assume that no arbitrage opportunities exist, and a risk-free interest rate of 11 percent. Answer = dollars. Please show proper step by step calculationarrow_forward
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