Comprehensive Case 7

On the basis of the constant growth dividend discount model, what must the Singers required rate of return be for the stock in the brokerage account to be priced fairly, assuming the current dividend is $.80 and the dividend growth rate is 3%? What are the implications on buying, selling, or holding the stock? [Hint: find the price per share first]

Elvis is concerned about the price of the stock in the brokerage account. During July 2019, he decides to buy put options to protect his position in the stock. The options have an expiration date of January 2020, and exercise price of $43.50, and a premium of $2.00 per share.

• How many option contracts (100 shares per contract) should he buy to fully hedge his long position in the stock?
• Elvis fully hedges his position with the above option. On December 31, 2019, the price of the stock has dropped to $37.20. What is his total unrealized gain or loss on the option contracts? [Hint: also need to consider the cost of the option premium]