1. The current price of a stock is $22, and at the end of one
year its price will be either $27 or $17. The annual risk-free rate is 6.0%,
based on daily compounding. A 1-year call option on the stock, with an exercise
price of $22, is available. Based on the binominal model, what is the option’s
value?
$2.43
$2.70
$2.99
$3.29
$3.62
2. Suppose you believe that Johnson Company’s stock price is
going to increase from its current level of $22.50 sometime during the
next 5 months. For $310.25 you can buy a 5-month call option giving you the
right to buy 100 shares at a price of $25 per share. If you buy this option for
$310.25 and Johnson’s stock price actually rises to $45, what would your
pre-tax net profit be?
-$310.25
$1,689.75
$1,774.24
$1,862.95
$1,956.10
3.An analyst wants to use the Black-Scholes model to value
call options on the stock of Ledbetter Inc. based on the following data:
The price of the stock is $45.
The strike price of the option is $40.
The option matures in 6 months (t = 0.5).
The standard deviation of the stockâs returns is 0.50, and the
variance is 0.25.
The risk-free rate is 5%.
Using the Black-Scholes model, what is the value of the call
option?
$2.81
$3.12
$3.37
$3.82
$9.36
4.The CFO of Lenox Industries hired you as a consultant to
help estimate its cost of common equity. You have obtained the following
data: (1) rd = yield on the firmâs bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2)
rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1
= $1.20, P0 = $35.00, and g = 8.00% (constant). You were asked
to estimate the cost of common based on the three most commonly used methods
and then to indicate the difference between the highest and lowest of these
estimates. What is that difference?
1.13%
1.50%
1.88%
2.34%
2.58%
5.You were hired as a consultant to Quigley Company, whose
target capital structure is 35% debt, 10% preferred, and 55% common equity.
The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%,
the cost of common from retained earnings is 11.25%, and the tax rate is 40%.
The firm will not be issuing any new common stock. What is Quigley’s
WACC?
8.15%
8.48%
8.82%
9.17%
9.54%
6.Eakins Inc.âs common stock currently sells for $45.00 per
share, the company expects to earn $2.75 per share during the current year, its
expected payout ratio is 70%, and its expected constant growth rate is 6.00%.
New stock can be sold to the public at the current price, but a flotation cost
of 8% would be incurred. By how much would the cost of new stock exceed
the cost of common from retained earnings?
0.09%
0.19%
0.37%
0.56%
0.84%
7.Eakins Inc.âs common stock currently sells for $45.00 per
share, the company expects to earn $2.75 per share during the current year, its
expected payout ratio is 70%, and its expected constant growth rate is 6.00%.
New stock can be sold to the public at the current price, but a flotation cost
of 8% would be incurred. By how much would the cost of new stock exceed
the cost of common from retained earnings?
0.09%
0.19%
0.37%
0.56%
0.84%
8.DeAngelo Corp.’s projected net income is $150.0 million, its
target capital structure is 25% debt and 75% equity, and its target payout
ratio is 65%. DeAngelo has more positive NPV projects than it can finance
without issuing new stock, but its board of directors had decreed that it
cannot issue any new shares in the foreseeable future. The CFO now wants to
determine how the maximum capital budget would be affected by changes in
capital structure policy and/or the target dividend payout policy. Versus the
current policy, how much larger could the capital budget be if (1) the target
debt ratio were raised to 75%, other things held constant, (2) the target
payout ratio were lowered to 20%, other things held constant, and (3) the debt
ratio and payout were both changed by the indicated amounts.
Increase in Capital Budget
Increase Debt to 75% Lower Payout to 20% Do Both
$114.0 $73.3 $333.9
$120.0 $77.2 $351.5
$126.4 $81.2 $370.0
$133.0 $85.5 $389.5
$140.0 $90.0 $410.0
9.Keys Financial has done extremely well in recent years, and
its stock now sells for $175 per share. Management wants to get the price down
to a more typical level, which it thinks is $25 per share. What stock split
would be required to get to this price, assuming the transaction has no effect
on the total market value? Put another way, how many new shares should be given
per one old share?
6.65
6.98
7.00
7.35
7.72
10.Brooks Corp.’s projected capital budget is $2,000,000, its
target capital structure is 60% debt and 40% equity, and its forecasted net
income is $600,000. If the company follows a residual dividend policy, what
total dividends, if any, will it pay out?
$240,000
$228,000
$216,600
$205,770
$0