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Homework 1-3 Solutions

# Homework 1-3 Solutions - Fin 360 Fall 2009 Homework...

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Fin 360 – Fall 2009 Homework Assignments 1 through 3 Solutions Assignment #1 Chapter 2 problems: 1, 8, 9, 11, 17 1. Taxable equivalent yield = .0675 / (1-.35) = .1038 8. a. At t = 0, the value of the index is: (90 + 50 + 100)/3 = 80 At t = 1, the value of the index is: (95 + 45 + 110)/3 = 83.3333 The rate of return is: (83.3333/80) – 1 = 4.167% b. In the absence of a split, stock C would sell for 110, and the value of the index would be: (95 + 45 + 110)/3 = 83.3333 After the split, stock C sells at 55. Therefore, we need to set the divisor (d) such that: 83.3333 = (95 + 45 + 55)/d…. .d = 2.340 c. The rate of return is zero. The index remains unchanged, as it should, since the return on each stock separately equals zero. 9. d. Total market value at t = 0 is: (9,000 + 10,000 + 20,000) = 39,000 Total market value at t = 1 is: (9,500 + 9,000 + 22,000) = 40,500 Rate of return = (40,500/39,000) – 1 = 3.85% e. The return on each stock is as follows: R a = (95/90) – 1 = 0.0556 R b = (45/50) – 1 = –0.10 R c = (110/100) – 1 = 0.10 The equally-weighted average is: [0.0556 + (-0.10) + 0.10]/3 = 0.0185 = 1.85% 11. f. The taxable bond. With a zero tax bracket, the after-tax yield for the taxable bond is the same as the before-tax yield (5%), which is greater than the yield on the municipal bond. g. The taxable bond. The after-tax yield for the taxable bond is: 0.05 x (1 – 0.10) = 4.5% h. You are indifferent. The after-tax yield for the taxable bond is:

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0.05 x (1 – 0.20) = 4.0% The after-tax yield is the same as that of the municipal bond. i. The municipal bond offers the higher after-tax yield for investors in tax brackets above 20%. 17. Value of call at expiration Initial Cost Profit a. 0 4 -4 b. 0 4 -4 c. 0 4 -4 d. 5 4 1 e. 10 4 6 Value of put at expiration Initial Cost Profit a. 10 6 4 b. 5 6 -1 c. 0 6 -6 d. 0 6 -6 e. 0 6 -6 Chapter 3 problems: 2, 3, 6, 13, 19 2. a.
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Homework 1-3 Solutions - Fin 360 Fall 2009 Homework...

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