Ret has 100 million shares outstanding, a current share price of $25, and no debt. Rets management believes that the shares are underpriced, and that the true value is $30 per share. Ret plans to pay $250 million in cash to its shareholders by repurchasing shares. Management expects that very soon new information will come out that will cause investors to revise their opinion of the firm and agree with Ret assessment of the firm's true value.


Assume that Ret is able to repurchase shares prior to the market becoming aware of the new information regarding Rets true value. After the repurchase, and following the release of the new information regarding the true value of Ret, the firm's share price is closest to _________.

• A. $30.60
• B. $31.50
• C. $28.75
• D. $30.00

Your firm has issued 35,000 bonds with a market price of $100 per bond. The firm also has 50,000 common shares outstanding at a price of $65 per share. If the common shares will pay a dividend of $2.50 at the end of the year and thereafter dividends will grow at a rate of 3%. If the after-tax yield on the firm's bonds is 6%, what is the firm's weighted average cost of capital?

Mr. Brown wants to buy a Tesla Model S car, whose price is $100, 848. The dealer offers a loan plan: $30, 000 down payment, $X at the end of year 1, year 2, year 3, and year 4. Assume the constant annual interest rate is 25%.

(a) What is X? [Hint: you may want to use calculators.]

(b) Suppose Mr. Brown accepts the offer. How much does Mr. Brown finance?

(c) What is the principle payment at the end of year 1?

(d) After taking the auto loan, Mr. Brown gets a refinance opportunity at the end of year 1 (right after he makes the first payment). That is, Mr. Brown can borrow from the bank to pay all remaining principle at the end of year 1. In this refinance plan, Mr. Brown needs to pay the bank $25, 000 at the end of year 2, year 3, year 4, and year 5. Will Mr. Brown choose to refinance? [Hint: the interest rate is still 25%. Mr. Brown will choose to refinance if and only if the NPV of the refinance plan is positive.]

Please focus on (d).

Martin has $100 and would like to buy shares of ABC stock. The current price ABC stock is $100 per share and he believes that it will go up by 5% in a month. He is considering buying one-month call options on ABC stock. A one-month call option on ABC stock with strike price being $102 costs $2. What is the profit for Martin should the share price of ABC stock do go up by 5% in a month? (5 points). If you were Martin, will you buy the option? Explain. (5 points

Suppose stock X has a price of $100 today. There are three possible scenarios one year later as detailed below. Let R denote the one-year return of stock X (today to one year later).

Scenario 1 Probability 20% Stock price $80 Dividend $0

Scenario 2 Probability 50% Stock price $105 Dividend $140

Scenario 3 Probability 0% Stock price $5 Dividend $5

Calculate: (a) R in each of these three scenarios. 1 (b) The volatility of R

Consider the following option strategy: • Long one call with $100 strike price, bought for $11 • Long one call with $90 strike price, bought for $20 • Short one call with $105 strike price, sold for $8 • Short one call with $95 strike price, sold for $16 1. Draw a picture of the payoff of the option strategy at expiration as a function of the stock price. 2. Draw a picture of the investor’s profit as a function of the stock price

A non-dividend paying stock has a price of $100. A 3 month Eurpoean call option on the stock with a strike of $95 is worth $9.90. Similarly, a 3 month European put option with the same strike is worth $3.80. If the continuously compounding interest rate is 5% per annum, is there an arbitrage opportunity? If so, how could you set up a portfolio to make a profit from it now (not having to wait for 3 months), and how much is that profit?

A stock price is currently priced at £100. Over each of the next two three-month periods it is expected to down by 7% or go up by 8%. The risk-free interest rate is 5% per annum with continuous compounding. What is the value of a six-month European call option with a strike price of £95?

If possible, please provide a detailed step by step as I would like to fully comprehend it rather than just copying it. Thank you :)

Uniform Distribution

You believe stock price will follow uniform distribution with mean of 100 and MAD 20. You are pricing a CALL option with strike at 110.

a. what is the range of the distribution?

b. what is the probability that the call will be ITM at expiration (ie stock price ends above strike at 110)?

c. what is the conditional mean of stock price when CALL is ITM (aka stock price is above strike 110)?

d. what is the conditional CALL option average payment when the CALL is ITM?

e. what is the fair value of the CALL today, ie the unconditional average payment today?

(additional practice: redo for 90 strike CALL, 90 strike PUT, 110 strike PUT)

The current price of the stock of Bufflehead company is C$100. During each six-month period it will either rise by 10% or fall by 10%. The interest rate is 6% per annum compounded semi-annually.

a. Calculate the value of a one-year European put option on Bufflehead's stock with an exercise price of C$115.

b. Recalculate the value of the Bufflehead put option, assuming that it is an American option.