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
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Problem 3 (a) rf = 2.5%
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Problem 4
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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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