15F FINC855-050
Assignments
September 17 for September 24
Assignments
For Today September 17
Quiz: Appendix, Chapter 2, Chapter 3
Chapter 4 The Federal Reserve System, Monetary Policy,
and Interest Rates
Current Events Finance Worthy Article, US or Gl
Intermediate
6.
When solving a question dealing with real options, begin by identifying the option-like features of
the situation. First, since Sardano will only choose to manufacture the steel rods if the price of steel
falls, the lease, which gives the
Since this payoff will occur 1 year from now, it must be discounted at the risk-free rate in order to
find its present value, which is:
PV = ($924,734.69 / 1.048)
PV = $882,380.43
Therefore, the right to build an office building over the next year is wort
4.
When solving a question dealing with real options, begin by identifying the option-like features of
the situation. First, since the company will exercise its option to build if the value of an office
building rises, the right to build the office buildi
3.
Since the contract is to sell up to 5 million gallons, it is a call option, so we need to value the
contract accordingly. Using the binomial mode, we will find the value of u and d, which are:
u = e/ n
u = e.46/ 12/3
u = 1.2586
d=1/u
d = 1 / 1.2586
d =
b.
c.
2.
Because he is risk-neutral, you should recommend the alternative with the highest net present
value. Since the expected value of the stock option package is worth more than $750,000, he
would prefer to be compensated with the options rather than
10. In a market with competitors, you must realize that the competitors have real options as well. The
decisions made by these competitors may often change the payoffs for your companys options. For
example, the first entrant into a market can often be re
Using these risk-neutral probabilities, we can determine the expected payoff to the
equityholders call option at expiration, which is:
Expected payoff at expiration = (.5231)($125,000,000) + (.4769)($0)
Expected payoff at expiration = $65,384,615.38
Since
34. a.
Going back to the chapter on dividends, the price of the stock will decline by the amount of the
dividend (less any tax effects). Therefore, we would expect the price of the stock to drop when a
dividend is paid. The price of put option will increa
CHAPTER 23
OPTIONS AND CORPORATE FINANCE:
EXTENSIONS AND APPLICATIONS
Answers to Concepts Review and Critical Thinking Questions
1.
One of the purposes to give stock options to CEOs (instead of cash) is to tie the performance of the
firms stock with the c
b.
To find the price per share, we can divide the total value of the equity by the number of shares
outstanding. So, the price per share is:
Price per share = Total equity value / Shares outstanding
Price per share = $36,613,523.91 / 500,000
Price per sha
7.
In one year, the company will abandon the technology if the demand is low since the value of
abandonment is higher than the value of continuing operations. Since the company is selling the
technology in this case, the option is a put option. The value
The stock price at node (A) is the current stock price. The stock price at node (B) is from an up move,
which means:
Stock price (B) = $58(1.2239)
Stock price (B) = $70.99
And the stock price at node (D) is two up moves, or:
Stock price (D) = $58(1.2239)(
15F FINC855-050
Assignments
September 10 for September 17
Assignments September 10, 2015
Given on September 3 for Today
Syllabus
Assignments Generally
Chapter 1 Introduction, Review Questions
Appendix 01 The Financial Crisis
Chapter 2 Determinants o
FALL 2015 FINC855-050
Financial Institutions and Markets
Course Overview & Beginning Assignments
Instructor:
Marilyn Talman, Esq., MS Finance
[email protected]
(302) 651-8514 or (302) 521-0503
F15 FINC855-050 Instructor
Marilyn Talman, Esq., MS Finance
In
Securities Laws and Acts
http:/www.securities-fraud.com/laws.html
Securities Act of 1933
The Securities Act of 1933 was enacted as a result of the market crash of 1929. It was the first
major piece of federal legislation to apply to the sale of securities
August 2002
Securities Law
Update is distributed
periodically by
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without charge, to
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Report addresses
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Inquiries abou
Confirming Pages
Chapter 1 Introduction
1
APPENDIX 1A:The Financial Crisis: The Failure of Financial Institutions Specialness
In the late 2000s, the United States, and indeed the world, experienced the worst financial
crisis since the 1930s and the Great
Writing Requirements
Efectve writng is animportant element of success
in this class, and the peer tutors in the University
Writng Center (016 Memorial) can help you to
improve in this area. The writng center provides free
one-on-one writng consultatons to
Citing sources in the text
Examples:
Author's name in text
Dover has expressed this concern (118-21).
Author's name in reference
This concern has been expressed (Dover 118-21).
Prepared by the Cornell University Library PSEC Documentation Working Group re
Similarly, the value of the put at node (C) is the present value of the expected value of the put at
nodes (E) and (F) since those are the only two possible stock prices after node (C). So, the value of
the put at node (C) is:
Put value (C) = [.4599($7) +
8.
Using the binomial mode, we will find the value of u and d, which are:
u = e/ n
u = e.70/ 12
u = 1.2239
d=1/u
d = 1 / 1.2239
d = 0.8170
This implies the percentage increase if the stock price increases will be 22 percent, and the
percentage decrease if
Next, we need to find the risk neutral probability of a price increase or decrease, which will be:
0.03 = 0.24(Probability of rise) + 0.19(1 Probability of rise)
Probability of rise = 0.5173
And the probability of a price decrease is:
Probability of decre
Value of company (in millions)
Today
1 year
Equityholders call option price with a strike of $320
(in millions)
Today
$380
1 year
$60
$0
$300
=Max(0, $380 320)
=Max(0, $210 320)
?
$210
If the project is successful and the companys value rises, the percent
And using put-call parity, the price of the put option is:
Put = $50,000e.06(5) + 25,372.50 46,000 = $16,413.41
The value of a risky bond is the value of a risk-free bond minus the value of a put option on the
firms equity, so:
Value of risky bond = $37,0
16. The stock price can either increase 15 percent, or decrease 15 percent. The stock price at expiration
will either be:
Stock price increase = $54(1 + .15) = $62.10
Stock price decrease = $54(1 .15) = $45.90
The payoff in either state will be the maximu
Intermediate
18. If the exercise price is equal to zero, the call price will equal the stock price, which is $75.
19. If the standard deviation is zero, d1 and d2 go to +8, so N(d1) and N(d2) go to 1. This is the no risk
call option formula, which is:
C =
The value of the debt is the firm value minus the value of the equity, so:
DA = $17,000 4,919.05 = $12,080.95
And the value of the firm if it accepts Project B is:
d1 = [ln($17,400/$15,000) + (.05 + .342/2) 1] / (.34 1 ) = .7536
d2 = .7536 (.34 1 ) = .413
Putting these values into the Black-Scholes model, we find the call price is:
C = $1,900,000(.4700) ($2,100,000e.05(1)(.3725) = $148,923.92
14. Using the call price we found in the previous problem and put-call parity, you would need to pay:
Put = $2,100,
b.
Using the equation presented in the text to prevent arbitrage, we find the value of the call is:
$70 = [($85 65)/($85 80)]C0 + $65/1.06
C0 = $2.17
5.
a.
The value of the call is the stock price minus the present value of the exercise price, so:
C0 = $6