I need help with the problem on page 4 of the Excel file. It's an options problem. Please answer the questions, including the embedded formulas and brief rationale you used to get the answer. Answer the problem in Excel. The price tree in included in the PDF. Please let me know if you can do this. Thank you!

I. A, in a weakly efficient stock market, today's stock prices would reflect all data of past prices, such that using technical analysis (using historical information such as stock charts) would be inneffective in making trading decisions. II. C, in a semi-strongly efficient stock market, public information, such as that found in earnings announcements, are responded to by stock prices immediately, not gradually. III. D, the Random Walk Hypothesis states that stock prices change randomly and independently and thus cannot be predicted. IV. B, EMH implies that, on average, profits from trading are zero because the markets are efficient, with market prices incorporating all relevant information and allowing no opportunities for arbitrage. V. Yes, I agree with Mark. In order for the market to be efficient, most market participants must believe that it is not, establishing thereby an enviornment by which the prices of mispriced securitiesthrough their buying and sellingare brought back into line. By the same token, if every participant believed that the market was inefficient, there would be no analysis of the it, mispriced securities would never be identified, and there would be no pressure driving securities toward their efficient price, and, therefore, inefficiency would prevail in the market. 1. (20) For Questions I to IV, choose only one answer and explain the rationale in one or two sentences. I. (4) Which of the following contradicts the proposition that the stock market is weakly efficient? (A) An analyst is able to identify mispriced stocks by looking at stock charts. (B) Mutual funds do\\]not outperform the market on average. (C) Some investors can earn abnormal profits. (D) The autocorrelations of stock returns are not significantly different from zero. II. (4) Which of the following would provide the strongest evidence against the semi-strong form o the efficient market theory? (A) Fundamental analysis does not help generate abnormal returns. (B) Technical analysis is worthless in identifying mispriced stocks. (C) Stock prices response to firms earnings announcements gradually. (D) Mutual fund managers do not beat the market on average. III. (4) A random walk occurs when (A) Stock price changes are random but predictable. (B) Stock prices respond slowly to both new and old information. (C) Past information is useful in predicting future prices. (D) Future price changes are uncorrelated with past price changes. IV. (4) Which of the following statements is true about the efficient market hypothesis? (A) It implies a rational market. (B) It implies that everyone makes zero profit from trading. (C) It implies perfect forecasting ability. (D) It implies that prices do not fluctuate. V. (4) Mark thinks that there is an interesting paradox of the efficient market hypothesis. If the market believes that prices reflect all information, investors will stop seeking mispriced securities. This may lead to more mispriced stocks and more inefficiency. However, if the market believes that inefficiency still exists, the competition of trying to be the first to find mispriced securities will make markets more efficient. Do you agree with Mark? Why or why not? Please briefly comment. ale in one or two et is weakly efficient? s. zero. the semi-strong form of hypothesis? t hypothesis. If the g mispriced securities. the market believes mispriced securities t? Please briefly Coupon payment of Risky Corp. bond = Price of Risky Corp bond = Face value of Risky Corp. bond = Years to maturity of Risky Corp. bond = Coupon payment of corporate bond = Price of government bond = Face value of government. bond = Years to maturity of government bond = a. Holding Period Return Holding Period Return = ((Selling Price - Purchase Price) + Total Coupon Payments) / Purchase Price HPR if Risky Corp. does not default = If Risky Corp. defaults, those investing in Risky Corp. will lose their investment; therefore the investment value will be 0 and so will the HPR. HPR if Risky Corp. defaults = b. Expected Return Expected Return on a Bond is RETe = (F-P)/P Expected return on Risky Corp. bond = The Risky Corp. bond is a risky bond. It lacks the requirement to be a risk-free bond of being free from default risk. Expected return on the government bond = c. The yield to maturity of a bond is given by the formula at the right. Yield to Maturity YTM of the government bond = The YTM of the government bond (approximately) equalling the expected return on the government bond means that the government bond is risk-free. d. E(R) of Risky Corp. Bond VS RF Rate The rate on the Risky Corp. bond if if were risk-free would be equal to it's YTM YTM of Risky Corp. bond = The YTM of the Risky Corp. bond not equalling the expected return on the Risky Corp. bond (7.53%) means that the Risky Corp. bond is not risk-free. A risk averse investor is one who prefers lower returns with known risks over higher returns with unknown risks and, therefore, would not purchase the Risky Corp bond at $930. $ $ $ $ 0 930.00 1,000.00 1 0 970.87 1,000.00 1 7.53% 0 7.53% 3.00% (20) Mr. Weiss just bought a zero-coupon bond issued by Risky Corp. for $930, with $1000 face value and one year to mature. He believes that the market will be in expansion with probability 0.9 and in recession with probability 0.05. In the event of expansion, Risky Corp. can always repay th debt. In the event of recession, the company would fail to meet its debt obligation. The bondholde would recover nothing and completely lose their investment, should the firm default. A zero-coupo government bond with the same maturity and face value is selling at $970.87. Assume that the government never defaults. The expected value and the standard deviation of the return of the mar portfolio are 10% and 40%, respectively. Risky Corps bond return has a correlation of 0.75 with th market portfolio return. Assume that interest is compounded annually. (a) (3) Suppose Mr. Weiss holds the bond to maturity. What will be his holding period return if Risky Corp. does not default? What will be his holding period return if the firm defaults? (b) (3) What is the expected return of the Risky Corp. bond? Is the bond risky or riskfree? Explain (c) (3) What is the YTM of the government bond? Explain. (d) (3) Compare the expected return of the Risky Corp. bond with the riskfree rate. Would a risk-averse investor buy the Risky Corp. bond at $930? Explain. (e) (4) What is the standard deviation of the return of the Risky Corp. bond? What is the beta of the bond? What would be the equilibrium expected return of the Risky Corp. bond if the CAPM holds? Does Mr. Weiss overvalue or undervalue the bond relative to the CAPM? (f) (4) Suppose Mr. Weiss changes his mind and sells his Risky Corp. bond. He invests in a portfol that allocates 60% of the money on the market portfolio, and the other 40% on the government bo What are the expected value and the standard deviation of his portfolio return? Is his portfolio efficient? Explain. 2.96% 7.25% p. for $930, with $1000 face expansion with probability 0.95 ky Corp. can always repay the bt obligation. The bondholders the firm default. A zero-coupon $970.87. Assume that the iation of the return of the market as a correlation of 0.75 with the y. is holding period return if if the firm defaults? ond risky or riskfree? Explain. e riskfree rate. Would a . bond? What is the beta of ky Corp. bond if the CAPM the CAPM? . bond. He invests in a portfolio er 40% on the government bond. io return? Is his portfolio Face value of bond = Price of bond = FV of bond = Annual coupon payment of bond = Spot price of gold = Emily's forward price = a. One-Year Interest Rate The 1-year interst rate can be found using the PV formula for the price of a bond, PV = FV/ ((1+Rate)^N). Isolatiing r, we get r = (FV/PV)^(1/N)-1. Thus, the 1-year interest rate = b. One-Year Gold Futures Price We can use the futures pricing formula, Futures Price = Spot price *(1+ rf - d). With no dividend term, this simplifies to, Spot price *(1+ rf). Thus, using a gold spot price of $1337, the futures price per ounce of gold for delivery in one year = c. Maximum Price for Forward Contract The maximum price I would pay for Emily's forward contract is the present value of the income I would gain by using the forward contract. For a forward contract with a delivery price of $1375, the maximum I would pay = No, the contract has not just been initiated, and it will gain or lose value until expiration. d. Risks to the Jewelry Producer If the jewelry producer delays purchasing the gold needed to fill the jewelry order, the price of gold could rise in the meantime, increasing production costs. As insurance, the jewelry producer could purchase a gold forward with a six-month maturity for the gold needed. Buy doing this, the jeweler would lock in the current price of gold and remove the risk that the price of gold is higher when it is purchased for use. The delivery price for the gold would = $ $ $ $ $ $ V = FV/ e= 1,000.00 919.00 888.00 88.00 1,337.00 1,375.00 6.20% no dividend term, ures price per ounce $ 1,419.93 $ 42.30 $ 1,377.84 ct the income I would 1375, the maximum I he price of gold could r could purchase a eler would lock in s purchased for use. (20) Prices of bond futures can be used to access the markets expectations abo interest rates and therefore can be used as the basis for pricing other financial 10-year annual coupon bond with face value $1,000 is currently selling for $9 price of this bond for delivery in 1 year is $888. The bond pays coupon of $88 Assume that the coupon is paid before the delivery of the bond. (a) (5) What is the 1-year interest rate implied by the spot and futures prices o Recall the PV formula of bond prices for a one-year horizon.) (b) (5) In the gold futures market, the spot price of gold is $1337 per ounce. T storage cost. What is the futures price per ounce of gold for delivery in one ye there is no uncertainty in interest rates. (c) (5) Suppose your friend Emily has also longed a forward contract on gold year from now. But the contract was entered last year. The forward price she l $1375. Clearly her contract is valuable now because the gold price has risen s and no one is able to lock in such a low price now. What is the maximum amo pay now for having her contract? Does it violate the proposition that forward contracts should have zero value at the time of initiation? Explain. (d) (5) A jewelry producer just received an order that is worth $1 million from store for gold necklaces to be delivered in 6 months. The producer will be paid He cant buy gold now because he cant afford the storage cost. Suppose the go can be produced instantaneously. What is the risk of the producer? What hedg would you recommend to him? Explain briefly why the strategy would work. http://www.chegg.com/homework-help/questions-and-answers/prices-bond-fu access-markets-expectations-future-interest-rates-therefore-used--q17676485 markets expectations about future or pricing other financial securities. A s currently selling for $919. The futures bond pays coupon of $88 annually. f the bond. spot and futures prices of bonds? (Hint: horizon.) old is $1337 per ounce. There is no old for delivery in one year? Suppose orward contract on gold for delivery one . The forward price she locked in was the gold price has risen since last year, hat is the maximum amount you would proposition that forward and futures ion? Explain. is worth $1 million from a department The producer will be paid in 6 months. age cost. Suppose the gold necklaces he producer? What hedging strategy he strategy would work. d-answers/prices-bond-futures-usedrefore-used--q17676485 Debt-to-equity raito a. Market Value If Trident were unlevered, it's market would be $16 million ($16,000,000).The value of a firm is independent of the firm's capital structure, according to MM propsition I. 60% of a firm is (20) Consider a two-date binomial model. A company has both debt and equity structure.The value of the company is 100 at Date 0. At Date 1, it is equally lik of the company increases by 25% or decreases by 20%. The total promised amo debtholders is 100 at Date1. The riskfree interest rate is 7%. (a) (4) What are the possible payoffs to the equityholders at date 1? What kind product has the same payoffs? Please describe the detailed characteristics of the product. (b) (4) What are the possible payoffs to the bondholders at date 1? Are they risk of financial product/portfolio has the same payoffs? Please describe the detailed of the financial product/portfolio. (c) (4) What is the value of the debt at Date 0? What is the value of the equity a (d) (4) Suppose the government announces that it guarantees the companys pay debtholders. How much is the government guarantee worth? (e) (4) Now we extend the model to a three-date setting. At both Date 1 and Da likely that the value of the company increases by 25% or decreases by 20%, as graph below. Suppose there is an American put option written on the entire firm price 100. What is the value of this American put at Date 0? http://www.chegg.com/homework-help/questions-and-answers/consider-two-da model-company-debt-equity-capital-structure-value-company-100-d-q9763731 pany has both debt and equity in its capital 0. At Date 1, it is equally like that the value 20%. The total promised amount to the rate is 7%. holders at date 1? What kind of financial detailed characteristics of the financial olders at date 1? Are they riskfree? What kind s? Please describe the detailed characteristics hat is the value of the equity at Date 0? guarantees the companys payment to the tee worth? etting. At both Date 1 and Date 2, it is equally 25% or decreases by 20%, as depicted in the ption written on the entire firm with strike at Date 0? -and-answers/consider-two-date-binomialue-company-100-d-q9763731 Worth of Trident = Debt-to-value ratio = EBIT = Tax rate = Cost of debt = a. Market Value/Return on Equity As an unlevered firm, Trident would have no interest payments (or interst savings), and the EBIT would be adjusted for tax at 30%. So the earnings after tax of Trident as an unlevered firm would be, EAT = EBIT*(1-tax rate) = The market value of Trident is the present value of the perpetuity, EAT discounted by the product of Trident's cost of debt times the corporate tax rate, 30%*8%: If Trident were and all-equity firm, the total equity in the company would be equal to its worth. And, since by the REO ratio formula, the expected REO is the net income attributable to shareholders divided by total shareholders equity in Trident, we get that expected REO = b. Expected Return before Announcement Using the D/V ratio, we get that the current debt of Trident, D = The cost of this debt @ 8%, i.e., the interest, is therefore = After subtracting interest from EBIT, we get EBT = So we get that EAT = EBIT*(1-tax rate) = Now, Trident's equity equals total worth less debt: So, finally we calculate the expected return on equity as ROE = $ 16,000,000.00 60.00% $ 2,400,000.00 30.00% 8.00% $ 1,680,000.00 $ 70,000,000.00 10.50% $ $ $ $ $ 9,600,000.00 768,000.00 1,632,000.00 1,142,400.00 6,400,000.00 17.85% (20) Trident Corporation is currently worth $16 million. Its current debt-to-value (D/V) ratio is 60%. The company is confident in meeting its debt obligation, and wants to introduce mo debt to take advantage of the tax shield of interest payment. It is planning to repurchase part of the common stock by issuing more corporate debt. As a result, the firms debt value is expected to rise by $1.4 million. The cost of debt is 8 percent per year. Trident expects to have an EBIT of $2.4 million per year in perpetuity. Tridents tax rate is 30%. (a) (4) What would be the market value of Trident Corporation if it were unlevered? What would be the expected return on equity if Trident were an all-equity firm? (b) (4) What is the expected return on the firms equity before the announcement of the stock repurchase plan? (c) (4) What is the value of equity after the announcement of the stock repurchase plan? How much money do the equity holders expect to receive each year under the new capital structure? What is the expected return on the firms equity after the announcement? (d) (4) How much does the value of the firm increase after the announcement? If the goal is to maximize the firms value, would you recommend the CEO of Trident to borrow as much as they can? Please explain your rationale. Ignore the cost of financial distress and agency cost (e) (4) Now we consider the downside of debt borrowing: cost of financial distress and agency cost. The more debt there is, the more costly it could be when the firm fails to meet i debt obligation.Suppose the firm expects to incur an additional cost of $360,000 for this $1. million increase in leverage. If the goal is to maximize the firms value, would you recommend the CEO of Trident to proceed with this repurchase plan? Please explain your rationale. debt-to-value (D/V) ratio d wants to introduce more nning to repurchase part e firms debt value is ar. Trident expects to e is 30%. were unlevered? What firm? nouncement of the stock ck repurchase plan? How r the new capital nnouncement? uncement? If the goal is nt to borrow as much as distress and agency cost. nancial distress and n the firm fails to meet its of $360,000 for this $1.4 ue, would you n? Please explain your (,1) (4) Suppose the government announces that it guarantees the compariys payment to the debtholders. How much is the governrnent guarantee worth? (") ( ) Now we extend the model to a three-date setting. At both Date 1 and Date 2, it is equally Iikely that the value of the company increases by 25% or decreases by 20Ta, as depicted in the graph below. Suppose there is an American put option written on the entire firm with strike price 100. What is the value of this American put at Date 0? 156.25 Vaiue of the firm in a ttrree-date setting. (Note: This applies to part (e) ori1y.) 5. (20) tident Corporation is currently worth $16 milliorr. Its current debt-to-va1ue (D/V) ratio is 60%. The company is confldent in meeting its debt obligation, and wants to introduce more debt to take advantage of the tax shield of interest payment. It is planning to repurchase part of the common stock by issuing more corporate debl,. As a resuit, the flrms debt value is expected to rise by $1.4 million. The cost of debt is 8 percent per year. Tlident expects to have an EBIT of $2.4 miilion per year in perpetuity. Tlidents tax rafe is 30%. (u) (a) What would be the market value of Tlident Corporatir:n if it were unlevered? What would be the expected return on equity if Ttident were an a1l-equity flrm? (b) (4) What is the expected return on the flrms equity befbre the announcement of the stock repur- chase plan? (.) (a) What is the lalue of equity after the announcement of the stock repurchase plan? How much money do the equitvhoiders expect to receive each year under the new capital structure? What is the expected return on the firrns equity after the announcement? (d) (4) How much does the value of the flrm increase after the announcement? If the goal is to maxirnize the firms value, would you recommend the CEO of 'Ilident to borrow as rnuch as they can? Please explain your rationale. Ignore the cost of financial distress and agency cost. (") (a) Now we consider the downside of debt borrowing: cost of fi.nancial distress and agency cost. The rnore debt there is, the more costiy it could be when the firm lai1s'to meet its debt obligation. Suppose the firm expects to incur an additional cost of $360,000 for this $1.4 million increase in leverage. If the goai is to maximize the firms value, would you recommend the CEO of TYident to proceed with this repurchase plan? Please explain your rationale