Answers #6 & #10

Answers #6 & #10 - 1. The value of an option...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1. The value of an option depends on the stock's price, the risk-free rate, and the a. Exercise price. b. Variability of the stock price. c. Option's time to maturity. d. All of the above. e. None of the above. d. All of the above. 2. An investor who writes call options against stock held in his or her portfolio is said to be selling ___________ options. a. in-the-money b. put c. naked d. covered e. out-of-the-money d. covered 3. Suppose you believe that Du Pont's stock price is going to decline from its current level of $82.50 sometime during the next 5 months.  a. $1,950.00 b. $1,439.75 c. $1,489.75 d. $2,000.00 e. $2,435.00 5 month put= 5.1 per share Money made per share= 14.9 Money made for 100 shares= 1490 a. rd > rs > WACC. b. rs > rd > WACC. c. WACC > rs > rd. d. rs > WACC > rd. e. None of the statements above is correct. d there by rs= cost of equity, rd= cost of debt. 4. For a typical firm with a given capital structure, which of the following is correct?  (Note: All rates are after taxes.)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
5. Which of the following is not considered a capital component? a. Long-term debt. b. Common stock. c. Permanent short-term debt. d. Preferred stock. e. All of the above are considered capital components. c. Permanent short-term debt. a. A reduction in the market risk premium. b. An increase in the risk-free rate. c. An increase in the company’s beta. d. An increase in expected inflation. e. An increase in the flotation costs associated with issuing preferred stock. a. A reduction in the market risk premium. 7. Which of the following methods of estimating the cost of common equity for a firm treats risk explicitly? a. DCF method. b. CAPM method. c. Composite method. d. Bond-yield-plus-risk-premium method. e. Answers b and d are correct. e. Answers b and d are correct. a. 9.0% Ke= (DIV1/Po)+g b. 9.2% c. 9.6% d. 9.8% e. 10.0% Div1= Expected dividend per share next year. 6. Wyden Brothers uses the CAPM to calculate the cost of equity capital. The company’s capital structure consists of common stock, pre 8. Your company's stock sells for $50 per share, its last dividend (D0) was $2.00, and its growth rate is a constant 5 percent.  What is the
Background image of page 2
P0= Market price G= growth 5% Po = $50.00 Ke = cost of equity 9.20% a. 8.55% b. 9.33% WEIGHTED AVERAGE COST OF CAPITAL (based on Market v c. 9.36% 1 d. 9.87% Amount in mn Proportion e. 10.67% Long Term Debts 25 0.25 Common Stock 75 0.75 Total 100 a. 12.22% Ke= (DIV1/Po)+g b. 17.22% c. 10.33% d. 9.66% e. 16.00% Div1= Expected dividend per share next year. P0= Market price
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 07/12/2009 for the course ECN 1211 taught by Professor Maloney during the Spring '09 term at Fairleigh Dickinson.

Page1 / 70

Answers #6 & #10 - 1. The value of an option...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online