Please do all work in excel there are a total of 7 questions to be answered

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 B C D Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 1. (10 points) The exercise price on a put option is $40 and the price of the underlying stock is also $40 . Th will expire in 55 days. The option is currently selling for $0.50. a. Calculate the option's exercise value? b. Calculate the value of the premium over and above the exercise value? Why is an investor willing to pay more th exercise value? c. Is this an out-of-the money, at-the-money, or in-the-money option? Why? d. What will happen to the market price of the option if the underlying stock price changes to $38? Will the exercise the time value change? Explain. e. Explain the difference between a covered call option and a naked call option. Which option entails greater risk to d. What will happen to the market price of the option if the underlying stock price changes to $38? Will the exercise the time value change? Explain. A 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 B C D e. Explain the difference between a covered call option and a naked call option. Which option entails greater risk to investor? E F 1 tion 2 3 4 5 6 7 price of the underlying stock is also $40 . The option 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 ? Why is an investor willing to pay more than the 23 24 25 26 27 28 29 30 31 32 33 34 35 hy? 36 37 38 39 40 41 to $38? Will the exercise value or ock price changes 42 43 ption. Which option entails greater risk to the G ock price changes to $38? Will the exercise value or E F 44 45 46 47 ption. Which48 option entails greater risk to the 49 50 51 52 53 54 55 56 57 58 59 60 61 G Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 2. (15 points) The Marcus Company is evaluating the proposed acquisition of a new machine. The machine's price is $350,000, and it would cost another $125,000 to modify it for special use. The machine falls into the MACRS 3-y class, and it would be sold after 4 years for $40,000. The machine would require an increase in net working capital of $2 The machine would have no effect on revenues, but it is expected to save the firm $170,000 per year for 4 years in befo operating costs. . The company's marginal tax rate is 30 percent and its cost of capital is 10 percent. a. Calculate the cash outflow at time zero. b. Calculate the net operating cash flows for Years 1, 2, 3, and 4 MACRS 3 year class c. Calculate the non-operating terminal year cash flow. 0.3333 0.4445 0.1481 d. Calculate NPV. Should the machinery be purchased? Why or why not? on of a new machine. The machine's base The machine falls into the MACRS 3-year n increase in net working capital of $20,000. $170,000 per year for 4 years in before-tax ital is 10 percent. 0.0741 Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 3. (15 points) Jones Company stock trades at $60 a share. The company is contemplating a 3-for-2 stock split. Currently, the company has EPS of 63.00, DPS of $0.75, and 25 million shares of stock outstanding. Assuming that the s split will have no effect on the total market value of its equity, what will the company's stock price be after the split? a. How many shares of stock will be outstanding after the split? b. Calculate EPS after the split. c. Calculate DPS after the split. d. Calculate price per share after the split e. Calculate price after the split if the PE increases by 1 point (for example, if PE was 10 prior to split, it increases to 11 after the split) f. Why do companies split their stock? Why might a split cause the P/E to increase? plating a 3-for-2 stock split. nding. Assuming that the stock k price be after the split? Name______________________________________ Mid-term Examination FINC 5880 Session 5 Problem 4. (15 points) Shown below are exchange rates for several currencies. Spot rate 30-day forward rate 60-day forward rate US$ per 1 euro 1.21 1.19 1.15 US$ per 1 franc 1.03 1.06 1.07 Mexican peso per US$1 19.68 20.15 21.28 a. Is the euro appreciating or depreciating against the U.S. dollar? Explain. b. Is the Swiss franc appreciating or depreciating against the U.S. dollar? Why? c. Is the Mexican peso appreciating or depreciating against the U.S. dollar? Why? d. Using cross-rates, based on the spot rate, how many francs will the euro buy, how many pesos will the franc buy, an euro will the peso buy? e. A U.S. company purchases goods from several foreign companies with payment due in euros, francs, and pesos. Wo company be better off paying any of the suppliers now or should it wait 60 days? Why? y pesos will the franc buy, and how many euros, francs, and pesos. Would the Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 5. (15 points) The current market value of Tanus Corporation's equity is $90 million. The company has 25 mi outstanding shares and will issue 5 million new shares. The investment banker charges a 7% spread. a. What is the correctly valued offer price? b. How much cash will the company raise net of the spread? c What percentage of the company will new stockholders own? d. What are 3 reasons that explain why a firm wants to raise new equity capital? e. What are 3 reasons that explain why a firm would want to raise new capital through debt rather than equity? d. What are 3 reasons that explain why a firm wants to raise new equity capital? e. What are 3 reasons that explain why a firm would want to raise new capital through debt rather than equity? $90 million. The company has 25 million arges a 7% spread. ugh debt rather than equity? ugh debt rather than equity? Name______________________________________ Mid-term Examination FINC 5880 Session 5 The company appears to be carrying excess inventory and financing Question 6. (15 points) Angie Corporation is evaluating whether to lease or purchase equipment. Its tax rate is 30 perc extensively with debt. Bank borrowings are italready high, and the4liquidity company purchases the equipment for $2,000,000 will depreciate it over years, using straight-line depreciation. No situation is poor. On the basis of these observations, the loan be per year, payable at the beginning is expected. If the company enters into a 4-year lease, the lease paymentshould is $600,000 and the treasurer should beitadvised to seek Ifdenied, the company purchases the equipment will borrow from permanent its bank at ancapital, interest rate of 10 percent. especially equity capital. a. Calculate the cost of purchasing the equipment. b. Calculate the cost of leasing the equipment. c. Calculate the net advantage to leasing. Should the company purchase or lease the equipment? uipment. Its tax rate is 30 percent. If the straight-line depreciation. No salvage value r year, payable at the beginning of each year. of 10 percent. equipment? Name______________________________________ Mid-term Examination FINC 5880 Session 5 Question 7. (15 points) Marcal Corporation is considering a gold mining project would cost $15 million today and gene flows of $6 million a year at the end of each of the next 4 years. The project's cost of capital is 12%. a. Calculate the project's NPV if the company proceeds now. b. The company is fairly confident about its cash flow forecast, but expects to have better price information in 1 year. would be $18 million in 1 year. It estimates there is a 60% change CFs will be $9 million for 4 years and a 40% change C Should the company proceed with the project now or wait 1 year until it has better information? c. Apart from the calculations above, discuss 3 qualitative factors that the company should consider when making its d the new project. $15 million today and generate positive cash l is 12%. price information in 1 year. The company believes the cost 4 years and a 40% change CFs will be $5 million for 4 years. tion? consider when making its decision on accepting