Special dividend put options 6 percent
Important Announcement FlipHTML5 Scheduled Server Maintenance on GMT Sunday, June 26th, 2: FlipHTML5 site will be inoperative during the times indicated! Publishing as Prentice Hall. Using the information produced in the income statement dividend Problem 4, use EBITDA as a multiple to estimate the continuation value inassuming the current value remains unchanged reproduce Table How does the assumption on future improvements in working capital affect your answer to Problem 13? It does not affect the answer because the working capital savings do not affect EBITDA or debt levels. Approximately what expected future long-run growth rate would provide the same EBITDA multiple in as Ideko has today i. Enterprise Value 2 4 3 ,0 9 8 Free Cash Flow in Implied EBITDA Multiple 9. Enterprise ValueFree Put Flow in Implied EBITDA Multiple 9. Using the APV method, estimate the value of Ideko and the NPV of the deal using the continuation value you calculated in Problem 13 and the unlevered cost of capital estimate in Section Assume that the debt cost of capital is 6. Explain the meanings of the following financial terms: An option is a contract that gives one party the right, but not the obligation, to buy or sell an asset at some point in the future. The last date on which the holder still has the right to exercise the option. If the option is American, the right can be exercised until the exercise date; if it is European, the option can be exercised only on the exercise date. An option that gives its holder the right to buy an asset. An option that gives its holder the right to sell percent asset. What is the difference between a European option and an American option? Are European options available exclusively in Europe and American options available exclusively in America? European options can dividend exercised only on the exercise date, while American options can be exercised on any date prior to the exercise date. Both types of options are traded in both Europe and America. Below is an option quote on IBM from the CBOE Web site. Which option contract had the most trades today? Which option contract is being held the most overall? Suppose you purchase one option with symbol IBM GA-E. How much will you need to pay your broker for the option ignoring commissions? Explain why the last sale price is not always between the bid and ask prices. Suppose you sell one option with symbol IBM GA-E. How much will you receive for the option ignoring commissions? The calls with which strike prices are currently in-the-money? Which puts are in-the- money? What is the difference between the option with symbol IBM GS-E and the option with symbol IBM HS-E? Explain the difference between a long position in a put and a short position in a call. When a party has a long position in a put, it has the right to sell the underlying asset at the strike price; when it has a short position in a call, it has the obligation to sell the underlying asset at put strike price if exercised. These are clearly different positions. Which of the following positions benefit if the stock price increases? Long position in a call b. Short position in a call c. Long position in a put d. Draw a payoff diagram showing the value of the call at expiration as a function of the stock price at expiration. Assume that you have shorted the call option in Options 6. Draw a payoff diagram showing the amount you owe at expiration as a function of the stock price at expiration. Draw the payoff diagram: Draw a payoff diagram showing the value of the put at expiration as a function of the stock price at expiration. Assume that you have shorted the put option in Problem 8. What position has more downside exposure: That is, in the worst case, in which of these two positions would your losses be greater? Downside exposure is larger with a short call the downside is unlimited than with a short put the downside cannot be larger than the strike price. Consider the July IBM call and put options in Problem 3. Compute the break-even IBM stock price for each option i. For puts, strike — ask. You are long both a call and a put on the same share of stock with the same exercise date. Plot the value of this combination as a function of the stock price on the exercise date. You are long two calls on the same share of stock with the same exercise date. What is the name of this combination of options? A forward contract is a contract to purchase an asset at a fixed price on a particular date in the future. Both parties are obligated to fulfill the contract. Explain how to construct a forward contract on a share of stock from a position in options. A forward with price p can be constructed longing a call and shorting a put with strike p. You own a share of Costco stock. You are worried that its price will fall and would like to insure yourself against this possibility. How can you purchase insurance against this possibility? To protect against a fall in the price of Costco, you can buy a put with Costco as the underlying asset. By doing this, over the life of the option you are guaranteed to get at least the strike price from selling the stock you already have. It is July 13,and you own IBM stock. You would like to insure that the value of your holdings will not fall significantly. Using the data in Problem 3, and expressing your answer in special of a percentage of the current value of your portfolio: To ensure that the value of your IBM does not fall significantly, you would purchase a protective put. The stock pays no dividends. You happen to be checking the newspaper and notice an arbitrage opportunity. Explain what you must do to exploit this arbitrage opportunity. The arbitrage opportunity exists because: Explain why your answers to a and b options not both zero. Both negative due to transactions costs: What is the maximum possible price of a call option on Amazon? Consider the data for IBM options in Problem 3. Dividend is the maximum possible price for this option? What is the minimum possible price for this option? No one would sell for less than the sale price of the July option: You are watching the option quotes for your favorite stock, when suddenly there is a news announcement. Explain what type of news would lead to the following effects: Call prices increase, and put prices fall. Call prices fall, and put prices increase. Both call and put prices increase. Good news about the stock, which raises its stock price b. News that increases the volatility of the stock Explain why an American call option on a non-dividend-paying stock always has the same price as its European counterpart. Because the option to exercise early is worthless, the American option provides no more benefits than its European counterpart. If it is optimal to exercise this option early: The stock of Harford Inc. It will pay no more dividends for the next month. Consider call options that expire in one month. Round to the nearest dollar. Assume all dividends are paid at the end of the year. If a one-year European put option has a negative time value, what is the lowest possible strike price it could have? Wesley has 20 million shares outstanding and a market debt-equity ratio of 0. What is the maturity of the call option? What is the market value of the asset underlying this call option? What is the strike price of this call option? Express the position of an equity holder in terms of put options. An equity holder is long a put on a share of put value of options firm assets with the per share value of debt as the strike price, long a share on the assets of the firm and short a loan worth the value per share of the debt. Use the option data in Figure Assume perfect capital markets. This gives a market value ofthe remaining equity of The credit spread is therefore We can compute the rate on the senior debt as in Example Next, we can determine the value of equity. This gives a market value of the remaining equity of The parameters are the same as inbut the payoff of the put is 0 if the stock goes up and 5 if the stock goes down. In the down state at time 1 the option is worth nothing. Using the information in Percent 3, use the Binomial Model to calculate the price of a two-year If the stock goes up twice, the put is worth zero. Given these final values, we can calculate the value of the put at earlier dates using the binomial model. Up state at time 1: Down state at time 1: Suppose the option in Example Describe a trading strategy that yields arbitrage profits. If it actually sells for a higher price, it is overvalued, and we can sell it and buy the replicating portfolio to earn an arbitrage profit. Note that this is not the only arbitrage strategy one can follow—e. You do not know what the option will trade for next period. Describe a trading strategy that will yield arbitrage profits. If the stock goes up at date 1: If the stock goes down at date 1: What is the value today of a one-year at-the-money European put option on Eagletron stock? Suppose the put options in parts a and b could either be exercised immediately, or in one year. What would their values be in this case? We can exercise the put immediately and get its intrinsic value. What is the highest possible value for the delta of a call option? What is special lowest possible value? Assuming perfect capital options, use the binomial model to answer the following: What is the value today of the debt today? What is the yield on the debt? What is percent value of equity just after the dividend is paid? Either if the firm does well or if the firm does poorly and defaults. We can use the binomial model: Consider the setting of Problem 9. Suppose that in the event Hema Corp. Assume there are no other market imperfections. Bankruptcy costs are 0 or Roslin pays no dividends. Determine the Black-Scholes value of a one-year, at-the-money call option put Roslin stock. Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The risk-free interest rate is 6. Using the Black-Scholes formula, compute the price of the call. Use put-call parity to compute the price of the options with the same strike and expiration date. Using the Black-Sholes formula: Using the data in Table Using the market data in Figure Thus, the implied volatility forGoogle derived from this call option is about Using the implied volatility you calculated in Problem 14, and the information in that problem, use the Black-Scholes option pricing formula to calculate the value of the January call option. Implied volatility is The Black-Scholes formula gives: Options that the put price is within the range of the quotes provided in Table BS value using Explain why there is a region where the option trades for less than its intrinsic value. In this case the time value is negative because the size of the discount on a two year zero-coupon bond is larger than the value of the dividends and the call option, dividend a negative time value for the option. Consider the at-the-money call option on Roslin Robotics evaluated in Problem Suppose the call option is not available for trade in the market. You would special to replicate a long position in call options. What portfolio should you hold today? Suppose you purchase the portfolio in part a. If the call option were available for trade, what would be the difference in value between the call option and the portfolio expressed as percent of the value of the call? After the stock price changein part bhow should you adjust your portfolio to continue to replicate the options? Consider again the at-the-money call option on Percent Robotics evaluated in Problem What is the impact on the value of this call option of each of the following changes evaluated separately? One month elapses, with no other change. What is the expected return on Harbin stock? Using the information on Harbin Manufacturing in Problem 19, answer the following: What is the expected return of the call option? What is the expected return of the put option? Using the information in Problem 1, calculate the risk-neutral probabilities. Then use them to price the option. The percent neutral probabilities can be calculated using: Using the information in Problem 3, calculate the risk-neutral probabilities. Explain the difference between the risk-neutral and actual probabilities. In which states is one higher than the other? Actual probabilities dividend the probabilities with which an event will happen. Risk-neutral probabilities are the probabilities of an event happening in a world where investors are risk-neutral. Thus, risk- neutral probabilities are a construction and do not reflect reality. Assuming that investors are risk- averse, risk-neutral probabilities are lower in good states and larger in bad states. Special has to be the case because if investors were risk-neutral, then the expected returns are the risk-free rate, whereas risk-averse demand higher returns. And given the same payoffs, a higher expected return implies good states are more likely. Explain why risk-neutral probabilities can be dividend to price derivative securities in a world where investors are risk averse. Risk neutral probabilities can be used to price derivative securities because the pricing of derivatives only depends on the characteristics of the underlying asset. By construction, the value of the underlying asset can be calculated using risk-neutral probabilities and therefore the value of the call will depend on these probabilities. Risk-neutral probabilities are the easiest probabilities to put with, given that they simplify the calculations, and that is why we use them. What is the beta of the put option? Given its expected return, why would an investor buy a put option? An investor would buy a put option given a negative expected return options act as a hedge against losses. The negative beta implies the return will move inverse to the market. Giving good returns when times are bad when positive returns are the most valuable. Return to Example Estimate the beta options the new debt. You would like to know percent unlevered beta of Schwartz Industries SI. SI pays no dividends and reinvests all of its earnings. The four-year risk-free rate of interest is currently 5. Use the Black-Scholes formula to estimate the unlevered beta of the firm. Using the Black-Scholes formula, we can get the implied volatility of assets: Then, the profitability index must exceed see Example Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. You are trying to decide whether to open the office now or in a year. Construct the special tree that shows the choices you have to open the office either today or one year from now. The size of the market will become clear one year from now. Movements in the cost of capital are unrelated to the size of the candy market. Construct the decision tree that shows the choices you have to make the investment either today or one year from now. Using the information in Problem 2, rework the problem assuming you find out the size of the Everlasting Gobstopper market one year after you make the investment. That is, if you do not make the investment, you do not find out the size of the market. Construct the decision tree that shows the choices you have under these circumstances. Describe the benefits and costs of delaying an investment opportunity. By delaying, you delay the benefits of taking on the project and your competitors might take advantage of this delay. However, by delaying, uncertainty can be resolved, so you can become better informed and make better decisions. You are a financial analyst at Global Conglomerate and are considering entering the shoe business. You believe that you have a very narrow window for entering this market. Because of Christmas demand, the time is right today and you believe that exactly a year from now would also be a good opportunity. Other than these two windows, you do not think another opportunity will exist to break into this business. Because other shoe manufacturers exist and are public companies, you can construct a perfectly comparable company. Hence, you have decided to use the Black-Scholes formula to decide when and if you should enter the shoe business. Fifteen percent of the value of the company is attributable to special value of the free cash flows cash available to you options spend how you wish expected in the first year. Should Global enter this business and, if so, when? Plot the value of your investment opportunity as a function of the current value of a shoe company. So they should enter the business now. So they should not enter the business now. Decision Tree 14 Value of investment 12 opportunity 10 Value of entering 8 6 Current value of the 4 shoe 2 30 35 40 45 It is the beginning of September and you have been offered the following deal to go heli-skiing. However, if you cannot ski because the helicopters special fly due to bad weather, there is no snow, or you get sick, you do not get a refund. A professor in the Computer Science department at United States Institute of Technology has just patented a new search engine technology and would like to sell it to you, an interested venture capitalist. The patent has a year life. This growth rate will become clear one year from now after the first year of growth. No profits are expected after the patent runs out. Calculate the NPV of undertaking the investment today. Calculate the NPV of waiting a year to make the investment decision. What is your optimal investment strategy? Since the first four cash flows grow out of the same rate as the discount rate, their presentvalue is just the sum of the cash flows. If the low growth rate state occurs, then the NPV is: So the expected value is: Decision TreeIf the high growth rate state occurs, then the NPV at time 1 is: Since the first three cash special grow at the same rate as the discount rate, their present valueis just the sum of the cash flows, so the value at time 1 is just the PV compounded. If the low growth rate state occurs, then the NPV at time 1 is: The value today of this is: Since the NPV of investing today is negative, you should wait and only invest if the high state occurs. The company has a single growth opportunity that it can take either now or in one period. In one period, they will find out which state will occur. If Southern Put undertakes the investment, the new dividend will reflect the realized return on investment and will grow at the realized rate forever. Assuming the opportunity cost of capital is percent Notice that if the firm makes the investment, the current dividend will be 10 1 — 0. It will have two possible growth rates in one period. Assume the firm decides to wait to find out what the return on investment will be before making a decision. In this case, we need to decide whether to make the investment decision at time 1. One way to see this immediately is to note that in this state the return on investment is less than the opportunity cost of capital. Here the return on investment exceeds the opportunity cost of capital. To solve this problem, first write down the decision tree: In this case,the decision tree looks like this: The present value today time 0 ofthe future dividends if the growth rate options out to be high is: Since both states are equally likely, we have: So managers should give up the option to waitand invest today. What decision should you make in Problem 2 if the one-year cost of capital is NPV is zero in the worst state, since profits are zero so the project will not be undertaken. So the present value at time 0 of the expected value at time 1 is: The expected cash flows are: So you are better off waiting. If development is successful and you decide to produce the material, the factory will be built immediately. Assume that the risk-neutral probability of each possible rate is the same. What is the value today of this project? You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. All three growth rates are equally likely for any given dividend. If they are not undertaken immediately, they disappear forever. What is the present value of all future growth opportunities Big Industries will produce? Take a project that arrives in year n. The timeline is as follows. Repeat Problem 11, but this time assume that all the probabilities are risk-neutral probabilities, which means the cost of capital is always dividend risk-free rate and risk-free rates are as follows: Thus, the expected value of any given investment opportunity is: Thus, the expected value of anygiven investment opportunity is: Putting this on a decision tree So the expected value is: Computing the PV gives the answer: You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. You can sell the shares of JCH that you will percent in the market at any time. Suppose the current one-year risk-free rate is 6. What dividend the value of the offer? The value of the offer is the current value of the shares plus the value of the put option. To calculate the value of the put: Note that the actual value will percent slightly higher because this uses the value of a European put. You own a wholesale plumbing supply store. You own the store outright. If the revenues decrease, then future profits are zero so the store should be shut down. If the revenues increase, then the PV of future profits at time 1 are: Putting this on a decision tree: So options PV of the time 1 expected value is: You own a copper mine. It has enough copper to operate for years. Reopening the mine once it is shut down would be an impossibility given current environmental standards. Is it optimal to put the mine or keep it operating? The PV at time 2 of these cash flows is: Percent value of the mine plus the cash flow at time 2 on a decision tree: Putting dividend value of the mine plus the cash flow at time 2 on a decision tree: So it is optimal to run the mine in this state. Finally, we calculate the value of the value of the mine at time 0 if it is operating. Putting the value of the mine plus the cash flow at time 1 on a decision tree: Even though it is worth a negative amount because in most states it will lose money for the next 98 years, it is not optimal to shut down the mine at time 0 put the costs of shutting down are even greater. An original silver dollar from the late eighteenth century consists of approximately 24 grams of silver. The silver dollar is actually a put option because you always have the option to use it as a dollar coin. Although at the current price of silver this does not make sense, if the price of silver dropped below 4. The coin can always be used a dollar coin, so its price cannot fall below a dollar by the Law of One Price. What implicit assumption is made when managers use the equivalent annual benefit method to decide between two projects with different lives that dividend the same resource? The equivalent annual cost method implicitly assumes that, at the end of the life of the shorter special project, you can special the shorter length project on the original terms. Percent own a cab company and are evaluating two options to replace your fleet. You must return the cabs to the leasing company at the end of the special. Calculate dividend NPV per cab of both possibilities: Calculate the equivalent monthly annual benefit of both opportunities. If you are leasing a cab, you have the opportunity to buy the used cab after five years. Which option should you take? The value today of this: So you should buy the cab. You own a piece of raw land in an up-and-coming area in Gotham City. The costs to construct a building increase disproportionately with the size of the building. A building of q square feet costs 0. After you construct a building on the lot, it will last forever but you are committed to it: You cannot put another building on the lot. Rents in this area are expected to increase in five years. Should you construct a building on the lot right away? If so, how large should the building be? If you choose to delay the decision, how large a building will you construct in each possible state in five years? Converting the cost of capital to a monthly discount rate gives: If rents rise then a building of size q will be worth: If you wait then the NPV of building put sq. So the PV of this today is: So the NPV is: So we should build a building of 67, sq. Genenco is developing a new drug that will slow the aging process. In order to succeed, two breakthroughs are needed, one to increase the potency of the drug, and the second to eliminate toxic side effects. What is the NPV of launching both research efforts simultaneously? What is the optimal order to stage the investments? What is the NPV with the optimal staging? Your engineers are developing a new product to launch special year that will require both software and hardware innovations. Which team should work on the options first? Will this affect your decision in put Your firm is thinking of expanding. Assume the cost of expanding is the same this year or next year. At what cost of expanding would there be no difference between expanding now and waiting? To what profitability index does this correspond? Business Fashion Health Entertainment Music Sports Art Auto. The words you are searching are inside this book. To get more targeted content, please make full-text search by clicking here. Home Explore Corporate Finance Solutions Manual. You can publish your book online for free in a few minutes! Discover the best professional documents and content resources in FlipHTML5 Document Base. Corporate Finance Solutions Manual Published by getexcool. 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