a) Suppose that both a call and a put are traded on the stock of ABC Company; both have strike prices of $30 and mature in one-year. What is the payoff to the call option if the stock price is $25 at the end of the year?

b) Suppose that both a call and a put are traded on the stock of ABC Company; both have strike prices of $30 and mature in one-year. What is the payoff to the call option if the stock price is $35 at the end of the year?

c) Suppose that both a call and a put are traded on the stock of ABC Company; both have strike prices of $30 and mature in one-year. What is the profit to the call option if the option premium is $3 and the stock price is $35 at the end of the year?

d) Suppose that both a call and a put are traded on the stock of ABC Company; both have strike prices of $30 and mature in one-year. What is the profit to the put option if the option premium is $4 and the stock price is $35 at the end of the year?

A prospective MBA student earns $60,000 per year in her current job and expects that amount to increase by 11% per year. She is considering leaving her job to attend business school for two years at a cost of $45,000 per year. She has been told that her starting salary after business school is likely to be $75,000 and that amount will increase by 18% per year. Consider a time horizon of 10 years, use a discount rate of 12%, and ignore all considerations not explicitly mentioned here. Assume all cash flows occur at the start of each year (i.e., immediate, one year from now, two years from now,..., nine years from now). Also assume that the choice can be implemented immediately so that for the MBA alternative the current year is the first year of business school. What is the net present value of the more attractive choice?

1. The details of estimated project cost, sales and selling price of the product, depreciation and salvage value of a new project are given in the table below. All revenues and costs occur at the end of the period. The income tax rate is 20%. a) Find NPV of the project if the discount rate is 10%. b) The promoters has invested Rs 55 million in Year 1 and Rs 35 million in Year 2. Prepare the cash flow statement (Sources of funds and Disposition of funds). Show all calculations.                                         [5]  

Price, Inc., is considering an investment of $372,000 in an asset with an economic life of 5 years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $252,000 and $77,000, respectively. Both revenues and expenses will grow thereafter at the annual inflation rate of 5 percent. Price will use the straight-line method to depreciate its asset to zero over five years. The salvage value of the asset is estimated to be $52,000 in nominal terms at that time. The one-time net working capital investment of $13,500 is required immediately and will be recovered at the end of the project. All corporate cash flows are subject to a 34 percent tax rate. What is the project’s total nominal cash flow from assets for each year? (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

Cash flow Year 0$ =

Year 1 $ =

Year 2 $ =

Year 3 $ =

Year 4 $ =

Year 5 $ =

The first question:- below is the expected cash flow of the two investment opportunities (Project A, Project B) available to Rafidain, if you know that the net investment initial investment of project (A) is JD 500,000, while the net investment for project B is 600,000 JD. The company intends to finance the net investment for both projects according to the following: 40% with long-term loans, interest rate 8%, 40% in ordinary shares, if you know that the risk-free rate is 2%, the existing risk premium is 10%, and the beta is 1.5%. And 20% financing with retained profits. The tax rate is 30%.
Project A: First year 200,000, second year 200,000, third year 150,000, fourth year 50,000.
The second project B: the first year 150,000, the second year 150,000, the third year 250,000, the fourth year 150,000.

REQUIRED ;- The two projects are required to be evaluated in the light of
1- The standard of the period of recovery
2 - the price of the profitability index.

A company is selling an item that has made the following assumptions:

• Sold over a 15 year period

• The item’s demand in year one will be 15,000 units.

• During years 2-5, the annual growth of demand will be 10%.

• During years 6-15, the annual growth of demand will be 5%.

• It costs $5, payable at the end of year 1, to build each unit of annual production capacity.

• During year one, the item will sell for $7 per unit and will incur a variable cost of $4 to produce.

• The cost of maintaining a unit capacity during year 1 is $1.

• The sales price, unit variable cost, and unit capacity maintenance cost will increase by 3% per year.

• All cash flows are assumed to occur at the end of each year, and the corporate discount rate is 8%.

I would like to know what is the capacity level that should be chosen for the production facility based on its fifteen year cash flows?

Question 3/ Firm C is planning its first dividend in 4 years from now. Firm C retention ratio is 65%. Firm C current net income is $2millions with 500,000 shares outstanding. The net income is expected to grow by 1% during the next 4 years. The dividends are expected to grow during year 5 by 11.5% and during year 6 by 9.5%. From year 6 to year 14 they is no expected growth in dividends. However starting from year 15 there will be a constant dividend growth rate of 5% forever. The required rate of return on the stocks is 8%. a/ Compute the intrinsic value of the stock now? (Show your steps) b/ Compute the intrinsic value of the stock at the end of year 2? (Show your steps) c/ Compute the intrinsic value of the stock at the end of year 8? (Show your steps) d/ Compute the intrinsic value of the stock at the end of year 14? (Show your steps)

Cannington, Inc., designs, manufactures, and markets personal computers and related software. The following information was taken from a recent annual report of Cannington industries:

a. Compute the book value of the fixed assets for the current year and the preceding year.

A comparison of the book values of the current and preceding years indicates that they increased . A comparison of the total cost and accumulated depreciation reveals that Cannington purchased $ million of additional fixed assets, which was offset by the additional depreciation expense of $ million taken during the current year.

b. Would you normally expect the book value of fixed assets to increase or decrease during the year?
Increase

Good Time Co. is a regional chain department store. It will remain in business for one more year. The estimated probability of a boom year for next year is .60 and the estimated probability of a recession year for next year is .40. It is projected that Good Time will have a total cash flow of $250 million in a boom year and $100 million in a recession. Good Time’s required debt payment next year is $150 million. The firm has few fixed assets, so assume that after next year is over the firm is liquidated for $0. Assume the appropriate annual discount rate for cash flows to both equity holders and debtholders is 12%. There are no corporate or personal taxes.

1. What is the total value of equity today assuming no bankruptcy costs
2. If equity has the value you calculated in part (a) and the debt on Good Time is currently selling for $108.93 million, what is the expected bankruptcy cost for Good Time?

Question 3/ Firm C is planning its first dividend in 4 years from now. Firm C retention ratio is 65%. Firm C current net income is $2millions with 500,000 shares outstanding. The net income is expected to grow by 1% during the next 4 years. The dividends are expected to grow during year 5 by 11.5% and during year 6 by 9.5%. From year 6 to year 14 they is no expected growth in dividends. However starting from year 15 there will be a constant dividend growth rate of 5% forever. The required rate of return on the stocks is 8%.

a/ Compute the intrinsic value of the stock now? (Show your steps)
b/ Compute the intrinsic value of the stock at the end of year 2? (Show your steps)

c/ Compute the intrinsic value of the stock at the end of year 8? (Show your steps)

d/ Compute the intrinsic value of the stock at the end of year 14? (Show your steps)