Fi516 Homework Week 3

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Michelle White

FI-516 – WEEK 3 HOMEWORK PROBLEMS

Problem No. 1 on Options based on Chapter 8
A Call Option on the stock of XYZ Company has a market price of $9.00. The price of the underlying stock is $36.00, and the strike price of the option is $30.00 per share. What is the Exercise Value of this Call Option? What is the Time Value of the Option?

EV = $36.00 - $30.00 = $6
EV = $6.00

TV = $9.00 - $6.00 = $3.00
TV = $3.00

Problem No. 2 on Options based on Chapter 8
The Exercise (Strike) Price on ABC Company’s Option is $21.00, its Exercise Value is $23.00, and its Time Value is $7.00. What is the Market Value of the Option? What is the price of the underlying stock?

$23.00 = SP - $21.00
$23.00 + $21.00 = SP
Stock Price = $44.00

MV = MP - $23.00 = $7.00
MV = MP = $7.00 + $23.00
Market Value = $30.00

Problem on Capital Structure Change – Chapter 15 – No. 4

Nichols Corporation’s value of operations is equal to $500 million after a recapitalization (the firm had no debt before the recap). It raised $200 million in new debt and used this to buy back stock. Nichols had no short-term investments before or after the recap. After the recap, wd = 40%. What is S (the value of equity after the recap)?

S = (2,000,000 / .40) – 2,000,000
S = 5,000,000 – 2,000,000
S = 3,000,000

Problem on Capital Structure Change – Chapter 15 – No. 6

Dye Trucking raised $150 million in new debt and used this to buy back stock. After the recap, Dye’s stock price is $7.50. If Dye had 60 million shares of stock before the recap, how many shares does it have after the recap?

60,000,000 – (150,000,000 / 7.50)
60,000,000 – 20,000,000

Shares after recapitalization = 40,000,000

Problem on Swaps based on Chapter 23
Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR + 1.5%, and it can issue fixed-rate debt at 9.4%....
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