FUNDAMENTALS OF CORPORATE FINANCE
11th Edition
ISBN: 9781307110869
Author: Ross
Publisher: MCG/CREATE
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Chapter 25, Problem 10QP
Black–Scholes and Asset Value [L04] In the previous problem, suppose you wanted the option to sell the land to the buyer in one year. Assuming all the facts are the same, describe the transaction that would occur today. What is the price of the transaction today?
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4. Present value
Finding a present value is the reverse of finding a future value.
A. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future.
B. Which of the following investments that pay will $17,500 in 8 years will have a lower price today?
The security that earns an interest rate of 4.00%.
The security that earns an interest rate of 6.00%.
C. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 5.40%. Assuming that both investments have equal risk and Eric’s investment time horizon is flexible, which of the following investment options will exhibit the lower price?
An investment that matures in four years
An investment that matures in five years
D. Which of the following is true about present value calculations?
Other things remaining equal, the…
4. Present value
Finding a present value is the reverse of finding a future value.
A. is the process of calculating the present value of a cash flow or a series of cash flows to be received in the future.
B. Which of the following investments that pay will $17,500 in 8 years will have a lower price today?
The security that earns an interest rate of 4.00%.
The security that earns an interest rate of 6.00%.
C. Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 5.40%. Assuming that both investments have equal risk and Eric’s investment time horizon is flexible, which of the following investment options will exhibit the lower price?
An investment that matures in four years
An investment that matures in five years
D. Which of the following is true about present value calculations?
Other things remaining equal, the…
Suppose that we can describe the world using two states and that two assets are available, asset K an asset L. We assume the asset’s future prices have the following distribution
State
Future Price Asset K
Future Price Asset L
1
$55
$60
2
$45
$30
The current price of asset K is $50, and the current price of asset L is $50.
5. You plan to buy a home for $100,000 in the future. You want to guarantee that you will have the money.What would you buy/sell today to accomplish this, and what would it cost today?
Chapter 25 Solutions
FUNDAMENTALS OF CORPORATE FINANCE
Ch. 25.1 - Prob. 25.1ACQCh. 25.1 - Prob. 25.1BCQCh. 25.2 - Prob. 25.2ACQCh. 25.2 - Prob. 25.2BCQCh. 25.3 - Prob. 25.3ACQCh. 25.3 - Prob. 25.3BCQCh. 25.4 - Why do we say that the equity in a leveraged firm...Ch. 25.4 - Prob. 25.4BCQCh. 25.5 - Prob. 25.5ACQCh. 25.5 - Prob. 25.5BCQ
Ch. 25 - Prob. 25.1CTFCh. 25 - Prob. 25.3CTFCh. 25 - Prob. 1CRCTCh. 25 - Prob. 2CRCTCh. 25 - Prob. 3CRCTCh. 25 - Prob. 4CRCTCh. 25 - Prob. 5CRCTCh. 25 - Prob. 6CRCTCh. 25 - Prob. 7CRCTCh. 25 - Prob. 8CRCTCh. 25 - Prob. 9CRCTCh. 25 - Prob. 10CRCTCh. 25 - Prob. 1QPCh. 25 - Prob. 2QPCh. 25 - PutCall Parity [LO1] A stock is currently selling...Ch. 25 - PutCall Parity [LO1] A put option that expires in...Ch. 25 - PutCall Parity [LO1] A put option and a call...Ch. 25 - PutCall Parity [LO1] A put option and call option...Ch. 25 - BlackScholes [LO2] What are the prices of a call...Ch. 25 - Delta [LO2] What are the deltas of a call option...Ch. 25 - BlackScholes and Asset Value [LO4] You own a lot...Ch. 25 - BlackScholes and Asset Value [L04] In the previous...Ch. 25 - Time Value of Options [LO2] You are given the...Ch. 25 - PutCall Parity [LO1] A call option with an...Ch. 25 - BlackScholes [LO2] A call option matures in six...Ch. 25 - BlackScholes [LO2] A call option has an exercise...Ch. 25 - BlackScholes [LO2] A stock is currently priced at...Ch. 25 - Prob. 16QPCh. 25 - Equity as an Option and NPV [LO4] Suppose the firm...Ch. 25 - Equity as an Option [LO4] Frostbite Thermalwear...Ch. 25 - Prob. 19QPCh. 25 - Prob. 20QPCh. 25 - Prob. 21QPCh. 25 - Prob. 22QPCh. 25 - BlackScholes and Dividends [LO2] In addition to...Ch. 25 - PutCall Parity and Dividends [LO1] The putcall...Ch. 25 - Put Delta [LO2] In the chapter, we noted that the...Ch. 25 - BlackScholes Put Pricing Model [LO2] Use the...Ch. 25 - BlackScholes [LO2] A stock is currently priced at...Ch. 25 - Delta [LO2] You purchase one call and sell one put...Ch. 25 - Prob. 1MCh. 25 - Prob. 2MCh. 25 - Prob. 3MCh. 25 - Prob. 4MCh. 25 - Prob. 5MCh. 25 - Prob. 6M
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- f you think you can sell an asset for $15,000 in eight (8) years and you think the appropriate discount rate is 5%, how much would you be willing to pay for the asset today? Select one: a. $15,000 b. $10,153 c. $11,236 d. $15,771.00 e. None of the abovearrow_forwardSuppose that we can describe the world using two states and that two assets are available, asset K an asset L. We assume the asset’s future prices have the following distribution State Future Price Asset K Future Price Asset L 1 $55 $60 2 $45 $30 The current price of asset K is $50, and the current price of asset L is $50. You plan to buy a home for $100,000 in the future. You want to guarantee that you will have the money. What would you buy/sell today to accomplish this, and what would it cost today?arrow_forwardc. What do you expect its price to be one year from now? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) d-1. What is the implied capital gain? (Do not round intermediate calculations. Round your final answer to 1 decimal place.)arrow_forward
- QUESTION 7 If you have $100K, and want to invest in assets A, B and C. Asset A has historical AVG return of 15%, asset B 20%, and asset C 10%, in what proportions of $100K would you allocate into assets A, B and C? i.e. Which scenario is most rational? A > B > C A > C > B B > A > C C >A > Barrow_forwardH4. Work out the value of European Call on a risky asset A, currently selling at $600. The European Call has a term to maturity of 1.5 years and a strike price of $675. SD(dA/A), the volatility of returns on the risky asset is 18% per year, and the discrete risk-free rate is 0.9% per yeararrow_forwardQ2: I buy an investment for GBP 2,345,678.91 and sell it one week later for GBP 2,350,000.00. What is my yield?arrow_forward
- D3 Miguel would like you to calculate whether he has realized a capital gain or loss on a T-bill he recently sold. He bought the 91-day T-bill for $987,320 with an effective annual yield of 5.25%. Sixty days later, the effective interest rate fell to 4.25% and he sold the T-bill for $996,470. What is Miguel's capital gain on this transaction? a) $ 810 b) $1,150 c) $2,370 d) $3,530arrow_forwardYou want to limit your 1% VaR to $100,000. How much can you own of an asset with 40% annualized volatility and Normal returns? Options A $1,703,273 B $5,871 C $93,200 D $107,296arrow_forwardYou can buy property today for $2.0 million and sell it in 4 years for $3.0 million. (You earn no rental income on the property.) a. If the interest rate is 12%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) b. Is the property investment attractive to you? c-1. What is the present value of the future cash flows, if you also could earn $100,000 per year rent on the property? The rent is paid at the end of each year. (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) c-2. Is the property investment attractive to you now?arrow_forward
- 2,- HOW MUCH WILL A CAPITAL OF $10000 AT 18% OF CAPITALIZABLE INTEREST PRODUCESEMESTER IN 5 YEARSA) $23600.63B) $23588.6C) OTHERD) $23673.63 The images are NOT visible in the problem that had already been solved a moment agoarrow_forward5 Consider an asset with current price 26 that provides income 0.50 in 3 months time. The price of a 6-month European call on the asset with strike 24 is ct = 1.75 and the risk free rate is4.5% for all maturities.(i) Show that there is an arbitrage opportunity.(ii) Construct an appropriate arbitrage portfolio to take advantage of the situation and determine the profit per call option used.arrow_forwardBasic NPV methods tell us that the value of a project today is NPV0. Time value of money issues also lead us to believe that if we choose not to do the project that it will be worth NPV1 one period from now, such that NPV0 > NPV1. Why then do we see some firms choosing to defer taking on a project?arrow_forward
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