•Acme Inc. makes widgets that include 1 oz. of platinum. The current spot price of platinum is 1,440/oz. One widget will sell for 2,000 and has non platinum costs of 500 to produce (So, their profit function is P(x)= 2,000x – 500). The risk free rate is 4%. The widgets are to be made and sold at time 1. Calculate the unhedged and hedged profits at the end of one year if Acme sells all 100 widgets that they produce given the price of platinum one year from today is (a) 1,375/oz. (b) 1,475/oz. (c) 1,575/oz.

•For hedging with forwards use one year contracts with forward price of 1,450/oz.

•For hedging with options use one year call options with a strike price of 1,425/oz. with a premium of 30.00/oz.

Problem 1:

The following information is given about options on the stock of a certain company:

            S₀ = $80, X =$70, r =10% per year (continuously compounded), T = 9 months, s= 0.30

No dividends are expected. One option contract is for 100 shares of the stock. All notations are used in the same way as in the Black-Scholes-Merton Model.

1. What is the European call option price and European put option price, according to the Black-Scholes model?
2. What is the cost of buying a protective put?
3. What is the cost of writing a covered call?
4. What will be the payoff and profit of the protective put if the stock price on maturity is $60, $70, $76, $80, $86?
5. What will be the payoff and profit of the covered call if the stock price on maturity is $60, $70, $76, $80, $86?

Earnings per Share, Price-Earnings Ratio, Dividend Yield

The following information was taken from the financial statements of Tolbert Inc. for December 31 of the current fiscal year:

The net income was $400,000 and the declared dividends on the common stock were $50,000 for the current year. The market price of the common stock is $9.80 per share.

For the common stock, determine (a) the earnings per share, (b) the price-earnings ratio, (c) the dividends per share, and (d) the dividend yield. If required, round your answers to two decimal places.

1. 20) The Temecula wine market is comprised of two (duopolist) wineries. Market demand for wine is P = 2500 – 2Q, which is produced at marginal cost MC = 100 for each firm. Market output Q = q_A + q_B (where A and B denote output of the two wineries.)

1. The two wineries act as Cournot duopolists. Write out each firm’s best (reaction) response function and find the market price and output for each winery.
2. Draw the best response functions and explain how the firms arrive at the equilibrium.
3. Compare the price and output in part (a) to if the two wineries collude as a single-price non-discriminating monopoly.
4. What would be the price and output in the market if both firms break the collusion agreement in part c and act as perfect competitors?

9.The following relations describe monthly demand and supply for a computer support service catering to small businesses.

Q_d= 3000 – 10P

Q_s= -1000 + 10P

What is the autarky price and quantity produced?

What is the Welfare of the country as a whole before trade? ________________

If the world Price is $250, is this country a net importer or exporter? _________

And by how much? _________

What is the welfare of the country after trade? ____________

What is the net gain from trade?

10. The following relations describes the demand and supply for good x..

Q_d= 100 – 20P

Q_s= 20 + 20P

What is the autarky price and quantity produced?

What is the Welfare of the country as a whole before trade?

If the world Price is $1, is this country a net importer or exporter?

And by how much?

What is the welfare of the country after trade?

What is the net gain from trade? __________

27. Viking InterWorks is a manufacturer that supplies memory products to original equipment manufacturers of desktop systems. The CEO read that the upcoming year’s projected demand for 512 MB desktop memory modules is Qd(memory)= 20000-80p(memory) -P(desktops)+ 0.6M. Where P(memory)  is the market price for 512 MB memory module, P(desktop) is the selling price of a desktop system, and M is consumer income.
    1. Are memory modules and desktop systems complements or substitutes. Please provide a reason for your answer. (2 points).
28. 1. What would be the impact on Viking InterWorks of a $2,116 increase in consumer income, accompanied by a $100 reduction in the price of desktops? (5 points)
    2. Calculate the income and cross price elasticities of demand when P(desktops)= $1040, P(memory)= $520, and M=$50,384 (8 points)

The Saunders Investment Bank has the following financing outstanding. Debt: 20,000 bonds with a coupon rate of 10 percent and a current price quote of 108.0; the bonds have 20 years to maturity. 190,000 zero coupon bonds with a price quote of 19.5 and 30 years until maturity.

Preferred stock: 110,000 shares of 8 percent preferred stock with a current price of $83, and a par value of $100.

Common stock: 2,200,000 shares of common stock; the current price is $69, and the beta of the stock is 1.35.

Market: The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 4 percent.

The Saunders Investment Bank has the following financing outstanding.

Debt: 90,000 bonds with a coupon rate of 6 percent and a current price quote of 106.4.; the bonds have 20 years to maturity. 280,000 zero coupon bonds with a price quote of 15.8 and 30 years until maturity. Both bonds have par value of $1000. Both bonds have semiannual compounding.

Preferred Stock: 150,000 shares of 4 percent preferred stock with a current price of $84, and a par value of $100. Common stock: 2,600,000 shares of common stock; the current price is $68, and the beta of the stock is 1.15.

Market: The corporate tax rate is 40 percent, the market risk premium is 7 percent, and the risk-free rate is 3.2 percent. What is the WACC for the company?

The Saunders Investment Bank has the following financing outstanding.

Debt: 59,000 bonds with a coupon rate of 5.2 percent and a current price quote of 106.3; the bonds have 14 years to maturity and a par value of $1,000. 18,700 zero coupon bonds with a price quote of 21.4, 28 years until maturity, and a par value of $10,000. Both bonds have semiannual compounding.

Preferred stock: 154,000 shares of 3 percent preferred stock with a current price of $85 and a par value of $100.

Common stock: 2,280,000 shares of common stock; the current price is $91 and the beta of the stock is 1.15.

Market: The corporate tax rate is 24 percent, the market risk premium is 7.2 percent, and the risk-free rate is 3.4 percent.

What is the WACC for the company?