Question 1)

Hill Ltd. is considering updating their systems, which will cost $100,000. The new system will be depreciated prime cost to zero over its 5-year life. It will probably be worth about $20,000 after 5 years.

The new machine will save $20,000 per year in operating costs. The tax rate is 30 per cent, and tax is paid in the year of income.

Hill Ltd. has several classes of outstanding bonds, and the average yield is 6%. Its beta is 1.3, historical market risk premium is 7.94%, and the treasury yield is 4%. The required rate of return for Hill is 14.32%

A)There is a put option on Hill shares with an exercise price of $30. If we expect the Hill share price to be $25 at the option expiry date in six months, what will be the pay-off from the put option?