Financial Management Chapter 7
Fall 2013 Corporate Financial Management Due: Thursday, October 31st Chapter 7 & Options
1. Assume that you sold a 100 call for $10. Calculate your profit/loss per share if the future stock prices are $80, $90, $100, $110. What type of investor (bullish or bearish) sell a call? Why?
2. Assume that you bought a 110 put for $11. Calculate your profit/loss per share if the future stock prices are $ $90, $100, $110, $120. What type of investor (bullish or bearish) buy a put? Why?
3. If a stock splits 5 for 3 how would the exchange adjust a put option contract with $80 as the exercise price?
4. If a stock splits 1 for 2 how would the exchange adjust a put option contract with $70 as the exercise price?
5. If a stock pays a common dividend of $2 per share, how would the exchange adjust a 100 call option contract on that stock?
6. A stock is expected to pay no dividends in the next two years. It will pay a dividend of $2.50 in year three. For years four and five the earnings are expected to increase at the rates of 30% and 25% respectively before settling on a constant growth of 7%.
a. What is current value of this stock if the required rate of return is 12%?
b. What will be the price of this stock at the end of year one from today?
c. What will be the dividend yield and capital gain yield for years 1 & 6?
d. Why are investors interested in knowing the distribution of return into dividend and capital gain components?
7. Calculate the last dividend paid on a stock that is priced at $25 per share. Its beta is 1.1, risk free rate is 2.5%, and the market risk premium is 8.2%. The dividends are expected to grow at a constant rate of 7% forever.
8. Based on the corporate valuation model, Bizzaro Co.'s value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40
1. Assume that you sold a 100 call for $10. Calculate your profit/loss per share if the future stock prices are $80, $90, $100, $110. What type of investor (bullish or bearish) sell a call? Why?
2. Assume that you bought a 110 put for $11. Calculate your profit/loss per share if the future stock prices are $ $90, $100, $110, $120. What type of investor (bullish or bearish) buy a put? Why?
3. If a stock splits 5 for 3 how would the exchange adjust a put option contract with $80 as the exercise price?
4. If a stock splits 1 for 2 how would the exchange adjust a put option contract with $70 as the exercise price?
5. If a stock pays a common dividend of $2 per share, how would the exchange adjust a 100 call option contract on that stock?
6. A stock is expected to pay no dividends in the next two years. It will pay a dividend of $2.50 in year three. For years four and five the earnings are expected to increase at the rates of 30% and 25% respectively before settling on a constant growth of 7%.
a. What is current value of this stock if the required rate of return is 12%?
b. What will be the price of this stock at the end of year one from today?
c. What will be the dividend yield and capital gain yield for years 1 & 6?
d. Why are investors interested in knowing the distribution of return into dividend and capital gain components?
7. Calculate the last dividend paid on a stock that is priced at $25 per share. Its beta is 1.1, risk free rate is 2.5%, and the market risk premium is 8.2%. The dividends are expected to grow at a constant rate of 7% forever.
8. Based on the corporate valuation model, Bizzaro Co.'s value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40