Question
. Suppose theS&P 500 is at 873 , and aone-year European call option with a strike price of $ 470 has a negative time value.
- . Suppose theS&P 500 is at 873, and aone-year European call option with a strike price of $470 has a negative time value. If the interest rate is 5 %
what can you conclude about the dividend yield of theS&P 500? (Assume all dividends are paid at the end of theyear.)
QUESTION: The dividend yield must be at least %. (Round to two decimalplaces.)
2. Hubbard Industries is anall-equity firm whose shares have an expected return of 9.9 %
Hubbard does a leveragedrecapitalization, issuing debt and repurchasingstock, until itsdebt-equity ratio is 0.54. Due to the increasedrisk, shareholders now expect a return of 14.5 %. Assuming there are no taxes andHubbard's debt isrisk-free, what is the interest rate on thedebt?
QUESTION: The interest rate is %. (Round to two decimalplaces.)
3. Colt Systems will have EBIT this coming year of $ 28
million. It will also spend $ 9 million on total capital expenditures and increases in net workingcapital, and have $ 4 million in depreciation expenses. Colt is currently anall-equity firm with a corporate tax rate of 38 %and a cost of capital of 12 %
a. IfColt's free cash flows are expected to grow by 8.5 % peryear, what is the market value of its equitytoday?
b. If the interest rate on its debt is 10 %how much can Colt borrow now and still havenon-negative net income this comingyear?
c. Is there a tax incentive today for Colt to choose adebt-to-value ratio that exceeds 89 %
Explain.
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