Question
1.After a year a company will pay $20 in dividends. It commits to paying $21 two years from the current date. This growth rate in
1.After a year a company will pay $20 in dividends. It commits to paying $21 two years from the current date. This growth rate in dividends is expected to continue indefinitely. The interest rate is 8%. Compute the current price of this stock using the dividend discount model.
2.A firm pays annual dividend of $6.50 each share. it expects the growth rate of the dividend to be 2.5% annually. If the interest rate is 5%. What does the dividend discount model predict the current price of the stock should be?
3.Imagine a baker who has the opportunity to bid on a contract to supply a local military base with bread for an entire year. The problem is the baker must commit to a price today and hold to that price for the entire year. Identify the risk faced by the baker, and explain how the use of future contracts could transfer the risk.
4.The current closing price of the stock of Apple is $87.50 and the July expiration options with a strike price of $80 are selling for $9.45, what us the intrinsic value of the option? What is the time value of the option?
5.Suppose you purchase a call option to purchase Toyota's common stock at $80 share in March. the current price of Toyota stock is #83 and the time value of the option is $5. what is the intrinsic value of the option? As the expiration date approaches, what will happen to the size of the time value of the option?
6.According to the expectations theory of the term structure. if interest rates are expected to be 2%, 2%, 4%, and 5% over the next four years, what is the yield on a three-year bond one year from today?
7. We have a firm that needs $1000 to obtain a new machinery for its business. it can either issue stock or bonds, or some combination of both. If it issues bonds it will have to pay $8 in interest for every $100 borrowed. Finally, assume the company earns $150 in good years and $75 in bad years, with equal probability. A)determine the payment to the equity holders under the following three scenarios 1)The firm uses 0% debt financing 2) 50% debt financing 3)80% debt financing B) Determine the expected equity return (%) under each scenario.
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