Investments HW5

# Investments HW5 - x = \$35 for \$12 buy call 1 dollar for...

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Investments Homework #5 Josh Kahn, Brandon Flowers, and Tom Lilly Problem 1 Firm X: Dividend \$2 Current price \$45 Growth rate 5% (a) Market capitalization rate of Firm X \$45 = \$2*(1.05)/r-.05 r = 9.67% (b) g = ROE x b 5% = ROE x 2/3 ROE = 7.50% PVGO = Vo - E(D1)/r PVGO = \$45 - \$2.10/9.67% \$23.28 (c ) Price of Y By = Bx Dividend growth of 10% for 3 yrs and 5% thereafter If same Beta, r = 9.67% for both yr 1 yr 2 yr 3 2.006079 2.012177 2.018293 45.41158 51.44813

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Problem 2 (a) Price-weighted index of the three stocks at t=0 \$25.43 Price-weighted index of the three stocks at t=1 \$26.57 Price-weighted index of the three stocks at t=1 \$26.00 (b) Divisor of price-weighted index for second period (c) Return on market value-weighted index for first period (d) Rate of return on equally weighted index for first period
Problem 3 (a) rf = 2.5%

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Problem 4
Problem 5 Call options: Payoff Gross payoff \$35 call \$40 call \$45 call
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Unformatted text preview: x = \$35 for \$12 buy call 1 dollar for every dollar above \$35 \$30 \$- \$(32) x = \$40 for \$8 sell 2 calls no loss for above \$40, \$2 loss for every dollar be 31 - \$(32) x = \$45 for \$4 buy call 1 dollar for every dollar above \$45 32 - \$(32) 33 - \$(32) (a) Gross payoff 34 - \$(32) 35 - \$(32) 36 1 \$(31) 1 37 2 \$(30) 2 38 3 \$(29) 3 39 4 \$(28) 4 40 7 \$(25) 5 2 41 10 \$(22) 6 4 42 13 \$(19) 7 6 43 16 \$(16) 8 8 44 19 \$(13) 9 10 45 22 \$(10) 10 12 46 26 \$(6) 11 14 1 47 30 \$(2) 12 16 2 (b) An arbitrage opportunity exists because an investor could buy 48 34 \$2 13 18 3 49 38 \$6 14 20 4 50 42 \$10 15 22 5 51 46 \$14 16 24 6 52 50 \$18 17 26 7 53 54 \$22 18 28 8 54 58 \$26 19 30 9 55 62 \$30 20 32 10 56 66 \$34 21 34 11 57 69 \$37 22 35 12 \$30 32 34 36 38 40 42 44 46 48 50 52 54 56 \$(40) \$(20) \$- \$20 \$40 \$60 Gross Payoff Stock price at expiration...
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## This document was uploaded on 11/04/2011 for the course BUSI 580 at UNC.

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Investments HW5 - x = \$35 for \$12 buy call 1 dollar for...

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