FI516_WEEK_3_HOMEWORK_ANSWER_KEY

FI516_WEEK_3_HOMEWORK_ANSWER_KEY - FI 516 WEEK 3 HOMEWORK...

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FI – 516 - WEEK 3 – HOMEWORK ANSWER KEY Problem 8–1 8-1 Exercise value = Current stock price – strike price = $30 - $25 = $5. Time value = Option price – Exercise value = $7 - $5 = $2. Problem 8–2 8-2 Option’s strike price = $15; Exercise value = $22; Time value = $5; V = ? P 0 = ? Time Value = Market price of option - Exercise value $5 = V - $22 V = $27. Exercise value = P 0 - Strike price $22 = P 0 - $15 P 0 = $37.
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Problem 15–8 15-8 a. Original value of the firm (D = $0): We are given that the book value of assets is equal to the market value of assets, so the value is $3,000,000. Alternatively, we can calculate the value as the sum of the debt (which is zero) and the stock (200,000 shares at a price of $15 per share): V = D + S = 0 + ($15)(200,000) = $3,000,000. Original cost of capital: WACC = w d r d (1-T) + w ce r s = 0 + (1.0)(10%) = 10%. With financial leverage (w d =30%): WACC = w d r d (1-T) + w ce r s = (0.3)(7%)(1-0.40) + (0.7)(11%) = 8.96%. Because growth is zero, FCF is equal to EBIT(1-T). The value of operations is
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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_WEEK_3_HOMEWORK_ANSWER_KEY - FI 516 WEEK 3 HOMEWORK...

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