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principles corporate finance

Questions and Answers of Principles Corporate Finance

Using the implied volatility you calculated in Problem 14, and the information in that problem, use the Black-Scholes option pricing formula to calculate the value of the 750 January 2014 call
Plot the value of a two-year European put option with a strike price of $20 on World Wide Plants as a function of the stock price. Recall that World Wide Plants has a constant dividend yield of 5%
Consider again the at-the-money call option on Roslin Robotics evaluated in Problem 11.What is the impact on the value of this call option of each of the following changes (evaluated separately)?a.
Harbin Manufacturing has 10 million shares outstanding with a current share price of $20 per share. In one year, the share price is equally likely to be $30 or $18. The risk-free interest rate is
Using the information on Harbin Manufacturing in Problem 19, answer the following:a. Using the risk-neutral probabilities, what is the value of a one-year call option on Harbin stock with a strike
Using the information in Problem 1, calculate the risk-neutral probabilities. Then use them to price the option.Appendix
Using the information in Problem 3, calculate the risk-neutral probabilities. Then use them to price the option.Appendix
Explain the difference between the risk-neutral and actual probabilities. In which states is one higher than the other? Why?Appendix
Explain why risk-neutral probabilities can be used to price derivative securities in a world where investors are risk averse.Appendix
Calculate the beta of the January 2010 $9 call option on JetBlue listed in Table 21.1. Assume that the volatility of JetBlue is 65% per year and its beta is 0.85. The short-term risk-free rate of
Consider the March 2010 $5 put option on JetBlue listed in Table 21.1. Assume that the volatility of JetBlue is 65% per year and its beta is 0.85. The short-term risk-free rate of interest is 1%per
Return to Example 20.11 (on page 754), in which Google was contemplating issuing zerocoupon debt due in 16 months with a face value of $163.5 billion, and using the proceeds to pay a special
You would like to know the unlevered beta of Schwartz Industries (SI). SI’s value of outstanding equity is $400 million, and you have estimated its beta to be 1.2. SI has four-year zerocoupon debt
Suppose that in December 2016, the spot exchange rate for the Japanese yen is ¥116/$. At the same time, the one-year interest rate in the United States is 4.85% and the one-year interest rate in
You are a U.S. investor who is trying to calculate the present value of a e5 million cash inflow that will occur one year in the future. The spot exchange rate is 5 = \($1.25/€\) and the forward
The dollar cost of debt for Healy Consulting, a U.S. research firm, is 7.5%. The firm faces a tax rate of 30% on all income, no matter where it is earned. Managers in the firm need to know its yen
Tailor Johnson, the menswear company with a subsidiary in Ethiopia described in Problem 13, is considering the tax benefits resulting from deferring repatriation of the earnings from the subsidiary.
Assume that in the original Ityesi example in Table 23.2, all sales actually occur in the United States and are projected to be $60 million per year for four years. Keeping other costs in pounds as
You are a senior financial analyst with IBM in its capital budgeting division. IBM is considering expanding in Australia due to its positive business atmosphere and cultural similarities to the
Explain the meanings of the following financial terms:a. Optionb. Expiration datec. Strike priced. Calle. Put Appendix
Explain the difference between a long position in a put and a short position in a call.Appendix
Which of the following positions benefit if the stock price increases?a. Long position in a callb. Short position in a callc. Long position in a putd. Short position in a put Appendix
You own a call option on Intuit stock with a strike price of $40. The option will expire in exactly three months’ time.a. If the stock is trading at $55 in three months, what will be the payoff of
Assume that you have shorted the call option in Problem 6.a. If the stock is trading at $55 in three months, what will you owe?b. If the stock is trading at $35 in three months, what will you owe?c.
You own a put option on Ford stock with a strike price of $10. The option will expire in exactly six months’ time.a. If the stock is trading at $8 in six months, what will be the payoff of the
Assume that you have shorted the put option in Problem 8.a. If the stock is trading at $8 in three months, what will you owe?b. If the stock is trading at $23 in three months, what will you owe?c.
What position has more downside exposure: a short position in a call or a short position in a put? That is, in the worst case, in which of these two positions would your losses be greater?Appendix
Consider the IBM call and put options in Problem 3. Ignoring any interest you might earn over the remaining few days’ life of the options:a. Compute the break-even IBM stock price for each option
You are long both a call and a put on the same share of stock with the same exercise date. The exercise price of the call is $40 and the exercise price of the put is $45. Plot the value of this
You are long two calls on the same share of stock with the same exercise date. The exercise price of the first call is $40 and the exercise price of the second call is $60. In addition, you are short
A forward contract is a contract to purchase an asset at a fixed price on a particular date in the future. Both parties are obligated to fulfill the contract. Explain how to construct a forward
You own a share of Costco stock. You are worried that its price will fall and would like to insure yourself against this possibility. How can you purchase insurance against this possibility?Appendix
It is February 21, 2022, and you own IBM stock. You would like to insure that the value of your holdings will not fall significantly. Using the data in Problem 3, and expressing your answer in terms
Dynamic Energy Systems stock is currently trading for $33 per share. The stock pays no dividends.A one-year European put option on Dynamic with a strike price of $35 is currently trading for $2.10.
You happen to be checking the newspaper and notice an arbitrage opportunity. The current stock price of Intrawest is $20 per share and the one-year risk-free interest rate is 8%. A oneyear put on
Consider the IBM call and put options in Problem 3. IBM paid a dividend on February 10, 2022, and was not scheduled to pay another dividend until May 2022. Ignoring the negligible interest you might
In mid-March 2022, European-style options on the S&P 100 index (OEX) expiring in December 2023 were priced as follows:Given an interest rate of 1.7% for a December 2023 maturity (21 months in the
Suppose Amazon stock is trading for $2000 per share, and Amazon pays no dividends.a. What is the maximum possible price of a call option on Amazon?b. What is the maximum possible price of a put
Consider the data for IBM options in Problem 3. Suppose a new American-style put option on IBM is issued with a strike price of $130 and an expiration date of April 1st.a. What is the maximum
You are watching the option quotes for your favorite stock, when suddenly there is a news announcement.Explain what type of news would lead to the following effects:a. Call prices increase, and put
Explain why an American call option on a non-dividend-paying stock always has the same price as its European counterpart.Appendix
Consider an American put option on XAL stock with a strike price of $55 and one year to expiration.Assume XAL pays no dividends, XAL is currently trading for $10 per share, and the one-year interest
The stock of Harford Inc. is about to pay a $0.30 dividend. It will pay no more dividends for the next month. Consider call options that expire in one month. If the interest rate is 6% APR(monthly
Suppose the S&P 500 is at 2700, and a one-year European call option with a strike price of$1200 has a negative time value. If the interest rate is 5%, what can you conclude about the dividend yield
Suppose the S&P 500 is at 2700, and it will pay a dividend of $90 at the end of the year.Suppose also that the interest rate is 2%. If a one-year European put option has a negative time value, what
Wesley Corp. stock is trading for $25/share. Wesley has 20 million shares outstanding and a market debt-equity ratio of 0.5. Wesley’s debt is zero-coupon debt with a 5-year maturity and a yield to
Express the position of an equity holder in terms of put options.Appendix
Use the option data from July 13, 2009, in the following table to determine the rate Google would have paid if it had issued $128 billion in zero-coupon debt due in January 2011. Suppose Google
Suppose that in July 2009, Google were to issue $96 billion in zero-coupon senior debt, and another $32 billion in zero-coupon junior debt, both due in January 2011. Use the option data in the
Homer Boats has accounts payable days of 38, inventory days of 65, and accounts receivable days of 32.What is its operating cycle?
FastChips Semiconductors has inventory days of 83, accounts receivable days of 45, and accounts payable days of 75.What is its cash conversion cycle?
Westerly Industries has the following financial information. What is its cash conversion cycle? Sales 100,000 Cost of Goods Sold 80,000 Accounts Receivable 30,000 Inventory 15,000 Accounts Payable
Aberdeen Outboard Motors is contemplating building a new plant. The company anticipates that the plant will require an initial investment of $3.5 million in net working capital today. The plant will
Your firm currently has net working capital of $250,000 that it expects to grow at a rate of 8% per year forever. You are considering some suggestions that could slow that growth to 6% per year. If
Assume the credit terms offered to your firm by your suppliers are 2/10, net 60.Calculate the cost of the trade credit if your firm does not take the discount and pays on day 60.
Your supplier offers terms of 4/10, net 60.What is the effective annual cost of trade credit if you choose to forgo the discount and pay on day 60?
The Saban Corporation is trying to decide whether to switch to a bank that will accommodate electronic funds transfers from Saban’s customers. Saban’s financial manager believes the new system
The Manana Corporation had sales of $280 million this year. Its accounts receivable balance averaged $25 million. How long, on average, does it take the firm to collect on its sales?
Your company had $12 million in sales last year. Its cost of goods sold was $8 million and its average inventory balance was $1,680,000. What was its average days of inventory?
You are the Chief Financial Officer (CFO) of Walmart. This afternoon you played golf with a member of the company’s board of directors. Somewhere during the back nine, the board member
Describe the different approaches a firm could take when preparing for cash flow shortfalls.
What are the permanent working capital needs of your company? What are the temporary needs (see MyFinanceLab for the data in Excel format)?The following table includes quarterly working capital
If you chose to use only long-term financing, what total amount of borrowing would you need to have on a permanent basis? Forecast your excess cash levels under this scenario (see MyFinanceLab for
If you hold only $100 in cash at any time, what is your maximum short-term borrowing and when (see MyFinanceLab for the data in Excel format)?The following table includes quarterly working capital
If you choose to enter the year with $400 total in cash, what is your maximum shortterm borrowing (see MyFinanceLab for the data in Excel format)?The following table includes quarterly working
If you want to limit your maximum short-term borrowing to $500, how much excess cash must you carry (see MyFinanceLab for the data in Excel format)?The following table includes quarterly working
The Hand-to-Mouth Company needs a $10,000 loan for the next 30 days. It is trying to decide among three options:Which alternative is the cheapest source of financing for Hand-to-Mouth? Alternative A:
Explain put-call parity.
It is August 21, 2013, and you have decided to purchase 10 September call contracts on Amazon’s stock with an exercise price of $285. Because you are buying, you must pay the ask price. How much
You are short a put option on Oracle stock with an exercise price of $20 that expires today. Plot the value of this option as a function of the stock price.
Assume you decided to purchase the September 275 through 290 put options quoted in Table 21.2 on August 21, 2013, and you financed each position by borrowing at 3% for 31 days. Plot the profit of
What is the difference between a European option and an American option?
Assume that you have shorted the call option in Problem 2.a. If the stock is trading at \($55\) in three months, what will you owe?b. If the stock is trading at \($35\) in three months, what will you
Assume that you have shorted the put option in Problem 4.a. If the stock is trading at \($8\) in three months, what will you owe?b. If the stock is trading at \($23\) in three months, what will you
Why do you think shareholders from target companies enjoy an average gain when acquired, while acquiring shareholders often do not gain anything?
Your company has earnings per share of \($4\). It has 1 million shares outstanding, each of which has a price of \($40\). You are thinking of buying TargetCo, which has earnings per share of \($2\),
The NFF Corporation has announced plans to acquire LE Corporation. NFF is trading at \($35\) per share and LE is trading at \($25\) per share, implying a premerger value of LE of \($4\) billion. If
Assume that all investors have the same information and care only about expected return and volatility. If new information arrives about one stock, can this information affect the price and return of
Assume that the CAPM is a good description of stock price returns. The market expected return is 7% with 10% volatility and the risk-free rate is 3%. New news arrives that does not change any of
Suppose the CAPM equilibrium holds perfectly. Then the risk-free interest rate increases, and nothing else changes.a. Is the market portfolio still efficient?b. If your answer to part (a) is yes,
You know that there are informed traders in the stock market, but you are uninformed. Describe an investment strategy that guarantees you will not lose money to the informed traders and explain why
What are the only conditions under which the market portfolio might not be an efficient portfolio?Appendix
Explain what the following sentence means: The market portfolio is a fence that protects the sheep from the wolves, but nothing can protect the sheep from themselves.Appendix
Why does the CAPM imply that investors should trade very rarely?Appendix
Your cousin Jess is a surgeon who suffers badly from the overconfidence bias. Jess loves to trade stocks and makes predictions with 100% confidence. In fact, Jess is uninformed like most investors.
To put the turnover of Figure 13.3 into perspective, let’s do a back of the envelope calculation of what an individual investor’s average turnover (per dollar invested) would be were he or she to
How does the disposition effect impact investors’ tax obligations?Appendix
Suppose that all investors have the disposition effect. A new stock has just been issued at a price of $50, so all investors in this stock purchased the stock today. A year from now the stock will be
Davita Spencer is a manager at El Cap Asset Management. She can generate an alpha of 2%a year up to $100 million. After that her skills are spread too thin, so cannot add value and her alpha is zero.
Allison and Bill are both mutual fund managers, although Allison is more skilled than Bill. Both have $100 million in assets under management and charge a fee of 1%/year. Allison is able to generate
Explain what the size effect is.Appendix
Assume all firms have the same expected dividends. If they have different expected returns, how will their market values and expected returns be related? What about the relation between their
Consider the following stocks, all of which will pay a liquidating dividend in a year and nothing in the interim:a. Calculate the expected return of each stock.b. What is the sign of correlation
Explain how to construct a positive-alpha trading strategy if stocks that have had relatively high returns in the past tend to have positive alphas and stocks that have had relatively low returns in
If you can use past returns to construct a trading strategy that makes money (has a positive alpha), it is evidence that market portfolio is not efficient. Explain why.Appendix
Explain why you might expect stocks to have nonzero alphas if the market proxy portfolio is not highly correlated with the true market portfolio, even if the true market portfolio is
Explain why if some investors are subject to systematic behavioral biases, while others pick efficient portfolios, the market portfolio will not be efficient.Appendix
Explain why an employee who cares only about expected return and volatility will likely underweight the amount of money he invests in his own company’s stock relative to an investor who does not
Using the factor beta estimates in the table shown here and the monthly expected return estimates in Table 13.1, calculate the risk premium of General Electric stock (ticker: GE) using the FFC factor
You are currently considering an investment in a project in the energy sector. The investment has the same riskiness as Exxon Mobil stock (ticker: XOM). Using the data in Table 13.1 and the table

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