FI516_Homework3_BrianLin - Brian Lin D01278742 Week 3...

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Brian Lin D01278742 Week 3 Homework Chapter 8 Questions Problem 8-1 A call option on the stock of Bedrock Boulders has a market price of $7. The stock sells for $30 a share, and the option has a strike price of $25 a share. What is the exercise value of the call option? What is the option’s time value? Stock Price $30 (a) Strike Price $25 (b) Price of Option $7 (c) Exercise Value of Option $5 (d) = (a) – (b) Time Value of Option $2 (c) – (d) Problem 8-2 The exercise price on one of Flanagan Company’s options is $15, its exercise value is $22, and its time value is $5. What are the option’s market value and the price of the stock? Exercise Value of Option $22 Exercise Price of Option $15 Time Value of Option $5 Option’s Market Value $27 (Exercise Value of Option + Time Value of Option) Price of the Stock $37 (Price of Stock – Exercise Value of Option = Exercise Price of Option) Chapter 15 Questions Problem 15-8 The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Assets (book = market) = $3M EBIT = $500K Cost of Equity, r s = 10% Stock Price, P 0 = $15 Shares Outstanding = 200,000 Tax Rate, T (Fed-plus-state)= 40% The firm is considering selling bonds and simultaneously repurchasing some of its stock. If
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This note was uploaded on 10/13/2011 for the course MAFM FI516 taught by Professor Anthonycriniti during the Spring '10 term at Keller Graduate School of Management.

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FI516_Homework3_BrianLin - Brian Lin D01278742 Week 3...

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