01. Do not use $ or , signs in your answer. Use a - sign if you lose money on the contract.
-629.47
Since the option expires out of the money, you will not exercise the opiton. Thus your profit is a loss of the Initial Premium.
11.
The current price of a stock is $ 59.11 and the annual effective risk-free rate is 7.4 percent. A call option with an exercise price of
$55 and one year until expiration has a current value of $ 6.38 . What is the value of a put option written on the stock with the same
exercise price and expiration date as the call option? Show your answer to the nearest .01. Do not use $ or , in your answer. Because
of the limitations of WEBCT random numbers, some of the options may be trading below their intrinsic value. Hint, to find the
present value of the bond, you do not need to make the e x adjustment, simple discount at the risk free rate.
-1.52
Chapter 15
1. Which of the following would increase the likelihood that a company would increase its debt ratio, other things held constant?
An increase in the corporate tax rate
2. Which one of the following is the legal proceeding under which an insolvent firm can be reorganized?
bankruptcy
3. For the M&M no tax theory, M & M Proposition II is the proposition that:
a firm's cost of equity is a linear function with a slope equal to (RA - RD)
4. Financial risk refers to the extra risk stockholders bear as a result of using debt as compared with the risk they would bear if no
debt were used.
True
5. Under M&M with corporate taxes Theory, Which of the following statements is most correct?
Since debt financing (after-tax) is cheaper than equity financing, raising a company's debt ratio will always reduce the
company's WACC
6. A firm has the following book-value balance sheet; Debt =$ 11 ,000, Common Stock ($1 par)= 364 and Retained Earnings = $ 4 ,
000. The book value of assets is the total of Debt, Common Stock and Retained Earnings. The firm's bonds are currently selling for $
1,284 and the firm's stock is currently selling for $ 12 . The firm's tax rate is 1 . What is the firm's market value? Show your answer to
the nearest $1. Do not use commas or the $ sign in your answer.
18,492
7. A firm has the following book-value balance sheet; Debt =$ 15 ,000, Common Stock ($1 par)= 640 and Retained Earnings = $ 22 ,
000. The book value of assets is the total of Debt, Common Stock and Retained Earnings. The firm's bonds are currently selling for $
920 and the firm's stock is currently selling for $ 26 . What is the firm's market value leverage ratio? Show your answer to the nearest
.1%, but do not use the % sign. Write your answer as whole numbers rather than decimals, thus do not write .502 or 50.2%, but
rather write 50.2.
45.3
8. Winter's Toyland has a debt-equity ratio of 0.65. The pre-tax cost of debt is 8.7 percent and the required return on assets is 16.1
percent. What is the cost of equity if you ignore taxes?

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