Finance homework
- An investor who writes standard call options against stock held in his or her portfolio is said to be selling what type of options?
Group of answer choices
- Put
- In-the-money
- Naked
- Out-of-the-money
- Covered
- Suppose you believe that Johnson Company’s stock price is going to increase from its current level of $22.50 sometime during the next 5 months.
For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share.
If you buy this option for $310.25 and Johnson’s stock price actually rises to $45, what would your pre-tax net profit be?
Group of answer choices
- $1,862.95
- $1,774.24
- $1,689.75
- $1,956.10
- -$310.25
- Suppose you believe that Delva Corporation’s stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $85 per share. If you bought this option for $510.25 and Delva’s stock price actually dropped to $60, what would your pre-tax net profit be?
Group of answer choices
- $2,303.38
- $1,989.75
- -$510.25
- $2,193.70
- $2,089.24
- An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data:
The price of the stock is $40. The strike price of the option is $40. The option matures in 3 months (t = 0.25). The standard deviation of the stock’s returns is 0.40, and the variance is 0.16. The risk-free rate is 6%.
Using the Black-Scholes model, what is the value of the call option?
Group of answer choices
- $2.81
- $3.47
- $3.12
- $4.20
- $3.82
- O’Brien Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm’s cost of common from retained earnings based on the CAPM?
Group of answer choices
- To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm’s tax rate is 40%, what is the component cost of debt for use in the WACC calculation?
Group of answer choices
- Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company’s WACC if all the equity used is from retained earnings?
Group of answer choices
8. Butcher Timber Company hired your consulting firm to help them estimate the cost of common equity. The yield on the firm’s bonds is 8.75%, and your firm’s economists believe that the cost of common can be estimated using a risk premium of 3.85% over a firm’s own cost of debt. What is an estimate of the firm’s cost of common from retained earnings?
Group of answer choices
- You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Quigley’s WACC?
Group of answer choices
- You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using retained earnings is 12.75%. The firm will not be issuing any new stock. What is its WACC?
Group of answer choices
- Bouchard and Company hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: D0 = $0.85; P0 = $22.00; and g = 6.00% (constant). The CEO thinks, however, that the stock price is temporarily depressed, and that it will soon rise to $40.00. Based on the DCF approach, by how much would the cost of common from retained earnings change if the stock price changes as the CEO expects?
Group of answer choices
- -2.03%
- -1.66%
- -1.84%
- -1.49%
- -2.23%
- An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data:
- The price of the stock is $40.
- The strike price of the option is $40.
- The option matures in 3 months (t = 0.25).
- The standard deviation of the stock’s returns is 0.40, and the variance is 0.16.
- The risk-free rate is 6%.
Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:
- d1 = 0.175
- d2 = -0.025
- N(d1) = 0.56946
- N(d2) = 0.49003
N(d1) and N(d2) represent areas under a standard normal distribution function. Using the Black-Scholes model, what is the value of the call option?
Group of answer choices
- $3.47
- $4.20
- $2.81
- $3.82
- $3.12
- The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option’s value?
Group of answer choices
- $2.99
- $2.70
- $2.43
- $3.29
- $3.62
- Bolster Foods’ (BF) balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current market value of $27 million. The balance sheet also shows that the company has 10 million shares of stock, and the stock has a book value per share of $5.00. The current stock price is $20.00 per share, and stockholders’ required rate of return, rs, is 12.25%. The company recently decided that its target capital structure should have 35% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs based on book, market, and target capital structures. What is the sum of these three WACCs?
Group of answer choices
- You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Quigley’s WACC?
Group of answer choices
- The CFO of Lenox Industries hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: (1) rd = yield on the firm’s bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of common based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?
Group of answer choices
- 2.58%
- 2.34%
- 1.13%
- 1.88%
- 1.50%
- Rivoli Inc. hired you as a consultant to help estimate its cost of common equity. You have been provided with the following data: D0 = $0.80; P0 = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of common from retained earnings?
Group of answer choices
- 10.69%
- 12.43%
- 11.84%
- 13.05%
- 11.25%
- Several years ago the Jakob Company sold a $1,000 par value, noncallable bond that now has 20 years to maturity and a 7.00% annual coupon that is paid semiannually. The bond currently sells for $925 and the company’s tax rate is 40%. What is the component cost of debt for use in the WACC calculation?
Group of answer choices
- 4.83%
- 4.28%
- 4.65%
- 5.03%
- 4.46%
- To help finance a major expansion, Castro Chemical Company sold a noncallable bond several years ago that now has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm’s tax rate is 40%, what is the component cost of debt for use in the WACC calculation?
Group of answer choices
- 5.33%
- 5.08%
- 4.83%
- 4.35%
- 4.58%
- Bosio Inc.’s perpetual preferred stock sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company’s cost of preferred stock for use in calculating the WACC?
Group of answer choices
- 9.44%
- 9.82%
- 10.22%
- 8.72%
- 9.08%
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