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sales of both call and put options can be made in an
orderly fashion. The options traded on the exchanges are standardized, and the price at which
they trade is determined by the forces of supply and
demand. Call and put options do not play a direct
role in the fund-raising activities of the financial
manager. On the other hand, currency options can
be used to hedge the firm’s foreign currency exposures resulting from international transactions.
LG6 (Solutions in Appendix B)
Lease versus purchase The Hot Bagel Shop wishes to evaluate two plans, leasing and borrowing to purchase, for financing an oven. The firm is in the 40% tax
Lease The shop can lease the oven under a 5-year lease requiring annual endof-year payments of $5,000. All maintenance costs will be paid by the lessor,
and insurance and other costs will be borne by the lessee. The lessee will exercise
its option to purchase the asset for $4,000 at termination of the lease.
Purchase The oven costs $20,000 and will have a 5-ye...
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- Fall '13