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All posts in General Questions

1. A zero cost forward on Intel stock with maturity in three months has a strike price of $26.86. The annual riskfree interest rate is 4%. Assuming no arbitrage opportunities, what is the current price of Intel stock?

2. A company pays quarterly dividends. The next dividend is due tomorrow, and it is expected to be $1. The dividends decrease by 1% every quarter. The annual cost of equity for the stock ( ) is 10%. What is the stock price?

3. If insiders with private information are able to obtain abnormally high returns, this represents a contradiction to the semi strong version of the Efficient Market Theory. True or False? Please explain.

4. A bond has a face value of $1,000, coupon rate of 8% (annual payments), yield to maturity of 7%, and maturity in 100 years. What is this bond s duration?
Hint: Calculate the bond s price. If the yield changed to 7.1%, how would the price change?

5. The current price of Caterpillar stock is $68.5. The annual standard deviation of the stock returns is 18%. The annual risk free interest rate is 5%. What is the value of a European Put option on Caterpillar stock with a strike price of $72 and maturity in 2.5 years?

A company wants to borrow $200,000 from a bank and repay in five equal annual end of year payments, including interest. If the bank wants to earn a 10% rate of return on the loan, what should the payment be? Ignore taxes and default risk.

Briefly provide your insight as to what dividend policy entails. What are some of the key questions related to / answered by dividend policy? What is the signaling hypthosis related to dividends? By what (valuation based) means can we support the basic premise of this hypthesis?

Redstone Corporation is considering a leasing arrangement to finance some special manufacturing tools that it needs for production during the next three years. A planned change in the firm s production technology will make the tools obsolete after 3 years. The firm will depreciate the cost of the tools on a straight line basis. The firm can borrow $4,800,000, the purchase price, at 10 percent on a simple interest loan to buy the tools, or it can make three equal end of year lease payments of $2,100,000. The firm s tax rate is 40 percent. Annual maintenance costs associated with ownership are estimated at $240,000. What is the net advantage to leasing (NAL)?

Florida Enterprises is considering issuing a 10 year convertible bond that will be priced at its $1,000 par value. The bonds have an 8.0 percent annual coupon rate, and each bond can be converted into 20 shares of common stock. The stock currently sells at $40 a share, has an expected dividend in the coming year of $5, and has an expected constant growth rate of 5.0 percent. What is the estimated floor price of the convertible at the end of Year 3 if the required rate of return on a similar straight debt issue is 10.0 percent?