A company has granted 2,000,000 options to its employees. The stock price and strike price are both $70. The options last 8 years and vest after 2 years. The company decides to value the options using an expected life of 6 years and a volatility of 30% per annum. Dividends on the stock are $1.50 per year, payable halfway through each year, and the risk-free is 5%. What will the company report as an expense for the options on its income statement?

1. (10 pts) The intrinsic value of a share of stock is equal to today’s value of all expected future cash flows to be received by an investor. The more risk the stock exposes the investor to, the less the investor shall be willing to pay. Support this thought with only two principles of finance.

Please show all work.

Currently YL trading at $54. Lee bought YL April $55 call option for $1.25. At expiration, YL’s price is 55.75, What is the option payoff? Profit?

Solution:
ITM Call Long Position Payoff = $0.75
Profit/Loss = 0.75 -1.25 = -$0.50   

Above is the question and the solution but, I am confused on how they came to this solution. Any help would be appreciated!

1. You’ve inherited $10,000. You’d like to have $20,000 in 5 years. What rate of return do you need to make on your investment to reach your savings goal?

2. You’re interested in buying a house and need a $5,000 down payment. How much do you need to set aside today if you can make 5% on your money to make sure you have $5,000 in three years.

3. You’ve decided you want to get your MBA, which will cost you $15,000. If you have $10,000 now and can make 7.5% on your money, how soon can you attend classes?

4. You’ve just been hired on your first job! Congratulations. The company has a 401(k) plan and you’ve decided to put 10% of your $45,000 salary away each year. If you can earn 8% annually on your money, how much will you have 35 years from now when you’re ready to retire?

5. You’re aunt Edna just retired at the age of 65 years old. She has an annuity with $750,000 and wants to begin taking payments until she’s 90 years old. If the annuity can earn 4.5% annually, how much can she take each year before the account gets to $0?

6. You have to choose between investing your $1000 in a band CD that pays 2.5% annually, or into a 20 year treasury bond that pays 2.2% semi-annually. Which investment pays a better rate of return?

 Barry Swifter is 60 years of age and considering retirement. ​ Barry's retirement portfolio currently is valued at​ $750,000 and is allocated in Treasury​ bills, an​ S&P 500 index​ fund, and an emerging market fund as​ follows:

a.  Based on the current portfolio composition and the given expected rates of​ return, the expected rate of return for​ Barry's portfolio is

( ) ​%.

​(Round to two decimal​ places.)

b.  If Barry moves all his money out of emerging market funds and puts it in Treasury​ bills, the expected rate of return for his portfolio is

( ) %

​(Round to two decimal​ places.)

Question 4. Cash Flow Valuation Model

A local investment banking firm, Denver Creek Inc., is evaluating a deal to acquire a sports apparel company, Breezee.

The company has a term loan requiring monthly payment and the principal of the loan to be paid down over the life of the loan (that is, amortized). The debt balance at year 0 is $150 million and the loan rate is 5% (APR or annual percentage rate =5%). The loan will mature at year 3 or in 36 months.

In the long term, the company plans to manage its capital structure to a target debt-to-value ratio. The target is set at the industry average level of 20%. When the term loan matures at the end of year 3, the company will refinance with new debt to reach the target level and will keep the debt ratio at 20% in the steady state (starting year 4).

The company’s capital structure over time is presented in the table below.

Other inputs and assumptions:
Unlevered cost of capital (Ru) = 9%; Cost of capital (Rwacc) in the steady state = 11% Tax rate = 21%; Long-term growth rate (LTg) = 2%

1. Determine the term loan’s monthly total payment, principle repayment and
interest payment, and construct the amortization schedule.
Note: An amortization schedule is a complete table of periodic loan payments, showing the amount of principal repayment and the amount of interest that comprise each payment until the loan is paid off at the end of its term. 


2. Choose the appropriate cash flow valuation model and explain your rationale.

3. Apply the model of your choice and estimate the target company’s value of operation. 


You buy a 20-year bond with a coupon rate of 9.9% that has a yield to maturity of 10.9%. (Assume a face value of $1,000 and semiannual coupon payments.) Six months later, the yield to maturity is 11.9%. What is your return over the 6 months?

Consider a project with the following data: accounting break-even quantity = 29,129 units; cash break-even quantity = 17,834 units; life = 10 years; fixed costs = $204,846; variable costs = $22 per unit; required return = 12 percent; depreciation = straight line. Ignoring the effect of taxes, what is the financial break-even quantity?

You have $600 in an account which pays 4.5 % compounded annually. How many additional dollars of interest would you earn over 4 years if you moved the money to an account earning 6.6 %?

How many additional dollars of interest would you earn over 4 years from the account that pays 6.6 %?

$___ (Round to the nearest cent.)

Andy promises to pay Opie $7,000 when Opie graduates from Mayberry University in 10 years. How much must Andy deposit today to make good on his promise, if he can earn 5 % on his investments?

How much must Andy deposit today to make good on his promise?

$ ___(Round to the nearest cent.)

A company is considering undertaking a new project. The project will require purchasing a machine for $250 today. The cost of the machine will be depreciated straight-line to zero over four years. Cash sales will be $230 per year for four years (from t=1 until t=4) and costs of goods sold will run $120 per year for these four years. At t=5 you sell the machine for $50. The firm has already spent $100 for R&D last year. The corporate tax rate is 35%. Calculate the unlevered net income and the free cash flows for years 0-5.

Suppose an individual invests $10,000 in a load mutual fund for two years. The load fee entails an up-front commission charge of 3 percent of the amount invested and is deducted from the original funds invested. In addition, annual fund operating expenses (or 12b-1 fees) are 0.80 percent. The annual fees are charged on the average net asset value invested in the fund and are recorded at the end of each year. Investments in the fund return 8 percent each year paid on the last day of the year. If the investor reinvests the annual returns paid on the investment, calculate the annual return on the mutual fund over the two-year investment period

(Do not round intermediate calculations. Round your answer to 3 decimal places. (e.g., 32.161))

Make sure the answer you provide is right please

Simply Chocolate Company is considering two possible expansion plans.Proposal X involves opening five stores in North Carolina at a cost of $2,400,000. Under Proposal Y, the company would focus on Virginia and open six stores at a cost of $3,000,000. The following information is given for the two proposals:

Proposal X Proposal Y

Required investment                                      $2,400,000        $3,000,000

Estimated life                                                   10 years              10 years

Estimated residual value                                  $200,000              $200,000

Estimated annual net cash flows                        $450,000             $580,000

Required rate of return                                       14%                      14%

Calculate the Accounting Rate of Return

2

Garida Co. is considering an investment that will have the following sales, variable costs, and fixed operating costs:

This project will require an investment of $10,000 in new equipment. The equipment will have no salvage value at the end of the project’s four-year life. Garida pays a constant tax rate of 40%, and it has a weighted average cost of capital (WACC) of 11%. Determine what the project’s net present value (NPV) would be when using accelerated depreciation.

Determine what the project’s net present value (NPV) would be when using accelerated depreciation. (Note: Round your intermediate calculations to the nearest whole number.)

$18,502

$24,670

$20,558

$16,446

Now determine what the project’s NPV would be when using straight-line depreciation._________

Using the_______ depreciation method will result in the highest NPV for the project.

No other firm would take on this project if Garida turns it down. How much should Garida reduce the NPV of this project if it discovered that this project would reduce one of its division’s net after-tax cash flows by $300 for each year of the four-year project?

$931

$559

$1,024

$698