# 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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FI516_WEEK_3_HOMEWORK_ANSWER_KEY - FI 516 WEEK 3 HOMEWORK...

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