Consider a 2-period binomial non-recombining model. Let r = 0.05 be the discrete interest rate for each of the periods, S(0) = 100 and suppose that the stock price follow four possible scenarios:
| Scenario | S(1) | S(2) |
| ?1 | Su | Suu |
| ?2 | Su | 103 |
| ?3 | 90 | Sdu |
| ?4 | 90 | 80 |
It is known that the risk-neutral probability for each scenario ?i , i = 1, 2, 3, 4 satisty P ? (?1) = 0.2, P? (?2) = 0.4, P? (?3) = 0.3, P? (?4) = 0.1.
(a) Draw the tree of the stock prices using Su , Suu, and Sdu, and find the risk-neutral probability for each route on the tree.
(b) Find the prices Su , Suu, and Sdu
(c) Find today’s price of a European call option with strike price K = $100 maturing after two steps.
(d) Find today’s price of an American put option with strike price $110 and expiration date in two steps. Should the American option be exercised early? If so, when?
In: Finance
Project A: This is a project for the use of commercial land the financier already owns. There are three mutually exclusive alternatives.
A1: Sell the land for $500,000
A2: Lease the property for a car-washing business. An annual income, after all costs (property taxes, etc.) of $98,700 would be received at the end of each year for 20 years. At the end of the 20 years, it is believed that the property could be sold for $750,000.
A3: Construct an office building on the land. The building will cost $4.5 million to construct and will not produce any net income for the first 2 years. The probabilities of various levels of rental income, after all expenses, for the subsequent 18 years are as follows:
|
Annual Rental Income |
Probability |
|
|
$1,000,000 |
0.1 |
|
|
$1,100,000 |
0.3 |
|
|
$1,200,000 |
0.4 |
|
|
$1,900,000 |
0.2 |
|
The property (building and land) probably can be sold for $3 million at the end of 20 years.
Analyze investment, if there is $4 million available for investment now (or $4.5 million if the Project A land is sold). What is the MARR in this situation?
Analyze investment, if there is $9 million available for investment now (or $9.5 million if the Project A land is sold).
In: Finance
|
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $13 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5.6 million with a 0.2 probability, $2.9 million with a 0.5 probability, and $0.4 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations. Debt/Capital ratio is 0.
Debt/Capital ratio is 10%, interest rate is 9%.
Debt/Capital ratio is 50%, interest rate is 11%.
Debt/Capital ratio is 60%, interest rate is 14%.
|
In: Finance
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $18 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5 million with a 0.2 probability, $2 million with a 0.5 probability, and $0.9 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.
Debt/Capital ratio is 0.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 10%, interest rate is 9%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 50%, interest rate is 11%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 60%, interest rate is 14%.
| RÔE = | % |
| σ = | % |
| CV = |
In: Finance
The Neal Company wants to estimate next year's return on equity
(ROE) under different financial leverage ratios. Neal's total
capital is $18 million, it currently uses only common equity, it
has no future plans to use preferred stock in its capital
structure, and its federal-plus-state tax rate is 40%. The CFO has
estimated next year's EBIT for three possible states of the world:
$5.1 million with a 0.2 probability, $3.3 million with a 0.5
probability, and $0.5 million with a 0.3 probability. Calculate
Neal's expected ROE, standard deviation, and coefficient of
variation for each of the following debt-to-capital ratios.
***Do not round intermediate calculations.***
***Round your answers to two decimal places at the end of the
calculations.***
Debt/Capital ratio is 0.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 10%, interest rate is 9%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 50%, interest rate is 11%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 60%, interest rate is 14%.
| RÔE = | % |
| σ = | % |
| CV = |
In: Finance
|
FINANCIAL LEVERAGE EFFECTS The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $18 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5.7 million with a 0.2 probability, $3.2 million with a 0.5 probability, and $0.9 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations. Debt/Capital ratio is 0.
Debt/Capital ratio is 10%, interest rate is 9%.
Debt/Capital ratio is 50%, interest rate is 11%.
Debt/Capital ratio is 60%, interest rate is 14%.
|
In: Finance
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $13 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.6 million with a 0.2 probability, $1.7 million with a 0.5 probability, and $0.4 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.
Debt/Capital ratio is 0.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 10%, interest rate is 9%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 50%, interest rate is 11%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 60%, interest rate is 14%.
| RÔE = | % |
| σ = | % |
| CV = |
In: Finance
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $18 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.6 million with a 0.2 probability, $3.5 million with a 0.5 probability, and $0.5 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.
Debt/Capital ratio is 0.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 10%, interest rate is 9%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 50%, interest rate is 11%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 60%, interest rate is 14%.
| RÔE = | % |
| σ = | % |
| CV = |
In: Finance
1. Which of the following statements is true?
A. Positive externalities lead to over production in the free market
B. The government may subsidize merit goods to increase social welfare
C. Public goods would be provided but expensive in the free market
D. The free market system maximizes consumer surplus
2. What does a deadweight social burden triangle mean?
A. Community surplus is maximized
B. Community surplus is minimized
C. The social marginal cost of the present output is greater than the social marginal benefit
D. The price of the product is minimized
3. Which of the following is not an injection into an economy?
A. Investment
B. Government spending
C. Export spending
D. Spending on imports
4. Equilibrium in an economy occurs when:
A. Planned savings equals planned taxation
B. Planned injections equals planned withdrawals
C. Planned investment is greater than planned savings
D. Injections plus withdrawals equals national income
5. The multiplier will be biggest when the marginal propensity to consume is:
A. 0.1
B. 0.2
C. 0.3
D. 0.4
In: Economics
The following data are for the two products produced by Tadros
Company.
| Product A | Product B | ||||
| Direct materials | $ | 14 per unit | $ | 26 per unit | |
| Direct labor hours | 0.3 DLH per unit | 1.6 DLH per unit | |||
| Machine hours | 0.2 MH per unit | 1.2 MH per unit | |||
| Batches | 115 batches | 230 batches | |||
| Volume | 10,000 units | 2,000 units | |||
| Engineering modifications | 10 modifications | 50 modifications | |||
| Number of customers | 500 customers | 400 customers | |||
| Market price | $ | 35 per unit | $ | 120 per unit | |
The company's direct labor rate is $20 per direct labor hour (DLH).
Additional information follows.
| Costs | Driver | |||
| Indirect manufacturing | ||||
| Engineering support | $ | 25,500 | Engineering modifications | |
| Electricity | 22,000 | Machine hours | ||
| Setup costs | 43,000 | Batches | ||
| Nonmanufacturing | ||||
| Customer service | 73,000 | Number of customers | ||
Required:
(Round your per unit cost answers to 2 decimal places and other
answers to nearest whole number. Loss amounts should be indicated
with minus sign.)
In: Accounting