Complete the sentences in the appropriate form of the appropriate adjective in the box, depending on the context

answer the questions with the word box and you have to have the word in the correct spot

Fin 325 Fall2020 Assignment 4

Release date: Nov11, 2020 Due date: Nov18, 2020 @ 11:59pm

Instructions:

Please finish this assignment in groups. The maximum number of students in each group is

five.

The final submitted copy should contain the group number in Canvas (if any), the name and

student ID of each group member.

The assignment must be finished and submitted through Canvas in an Excel format. No other

format will be accepted. Please organize your answer in an easy-to-read way.

1. Rocky Mountain Inc. is all-equity-financed. The expected rate of return on the

company’s shares is 14.75%.

A. What is the opportunity cost of capital for an average-risk Rocky Mountain investment?

B. Suppose the company issues debt, repurchases shares, and moves to a 38% debt-tovalue ratio (*D*/*V *= 0.38). What will be the company’s weighted-average cost of capital at

the new capital structure? The borrowing rate is 9.25% and the tax rate is 21%.

2. Urban Solar (US) has the opportunity to invest $2.15 million now (t = 0) and expects aftertax cash flow of $1,500,000 in t = 1 and $1,800,000 in t = 2. The project will last for two years

only. The opportunity cost of capital is 15% with all-equity financing, the borrowing rate is

7%, and US will borrow $1.8 million against the project. This debt must be repaid in two

equal installments of $900,000 each. Assume the tax rate is 21%.

A. Calculate the base case NPV of this project.

B. What is the interest tax shield each year?

C. Calculate the project’s APV.

D. If the firm incurs issue costs of $150,000 to raise the $1.8 million of required equity, what will

be the APV?

3. TreeOlivia’s stock price is $180 and could halve or double in each six-month period. The

interest rate is 12% a year.

A. What is the value of a six-month call option on TreeOlivia with an exercise price of

$120?

B. What is the option delta for the six-month call with an exercise of $120?

C. The payoffs of the six-month call option can be replicated by buying shares of stock

and borrowing. What amount should be invested in stock and what amount must be

borrowed? Assume the exercise price is $120.

D. What is the value of the one-year call option on TreeOlivia with an exercise of

$150? (Hint: use the two-step binominal tree)

E. What is the value of the one-year put option on TreeOlivia with an exercise of $150?

4. The following information is given:

I. Time to expiration 1 year.

II. Standard deviation 40% per year.

III. Exercise price $72.

IV. Stock price $72.

V. Risk free rate 4% a year.

A. Use the Black–Scholes formula to find the value of the call option.

B. What is the value of the put option with the same exercise price and time to expiration?

C. What is the value of the call option if time to expiration is 3 years?

D. What is the value of the call option if the standard deviation is 20%?

E. What is the value of the call option if the exercise price is $90?

F. What is the value of the call option if the current stock price is $50?

G. What is the value of the call option if the risk-free rate is 8%?

5. Tescac’s assets are worth $290. It has $175 of zero-coupon debt outstanding that is due to

be repaid at the end of two years. The risk-free interest rate is 5%, and the standard deviation

of the returns on Tescac’s assets is 40% per year.

A. What is the value of the put option owned by shareholders?

B. What is the value of the company’s debt?

C. What is the value of the company’s equity?

6. You own a bond with an annual coupon rate of 5% maturing in two years and priced at 85%.

Suppose that there is a 23% chance that at maturity the bond will default and you will receive

only 45% of the promised payment. Assume a face value of $1,000.

A. What is the bond’s promised yield to maturity?

B. What is its expected yield (i.e., the possible yields weighted by their probabilities)?

7. The owner of a pro-football team expects the team to be worth either $270 million next year

or $120 million, depending on whether or not she gets the city to build a new stadium. There is

a 60 percent chance she will get a new stadium. There is a buyer willing to pay $180 million for

the team right now. However, the buyer will keep his offer open—until the stadium issue is

resolved—if offered some form of compensation. If the interest rate is 6 percent, how much

should she be willing to pay the potential buyer for a one-year option to sell the team (round

to the nearest $1 million)?

8. Suppose Carol’s stock price is currently $20. If the standard deviation of the continuously

compounded returns (σ) on a stock is 60 percent per year. The monthly risk-free rate is 1

percent. Using one-step binomial tree, what is the current value of a six-month call option with

an exercise price of $15?

Don't use plagiarized sources. Get Your Custom Essay on

The appropriate adjective in the box

Just from $10/Page

Are you busy and do not have time to handle your assignment? Are you scared that your paper will not make the grade? Do you have responsibilities that may hinder you from turning in your assignment on time? Are you tired and can barely handle your assignment? Are your grades inconsistent?

Whichever your reason may is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.

Our essay writers are graduates with diplomas, bachelor, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college diploma. When assigning your order, we match the paper subject with the area of specialization of the writer.

- Plagiarism free papers
- Timely delivery
- Any deadline
- Skilled, Experienced Native English Writers
- Subject-relevant academic writer
- Adherence to paper instructions
- Ability to tackle bulk assignments
- Reasonable prices
- 24/7 Customer Support
- Get superb grades consistently

Basic features

- Free title page and bibliography
- Unlimited revisions
- Plagiarism-free guarantee
- Money-back guarantee
- 24/7 support

On-demand options

- Writer’s samples
- Part-by-part delivery
- Overnight delivery
- Copies of used sources
- Expert Proofreading

Paper format

- 275 words per page
- 12 pt Arial/Times New Roman
- Double line spacing
- Any citation style (APA, MLA, Chicago/Turabian, Harvard)

We value our customers and so we ensure that what we do is 100% original..

With us you are guaranteed of quality work done by our qualified experts.Your information and everything that you do with us is kept completely confidential.

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read moreThe Product ordered is guaranteed to be original. Orders are checked by the most advanced anti-plagiarism software in the market to assure that the Product is 100% original. The Company has a zero tolerance policy for plagiarism.

Read moreThe Free Revision policy is a courtesy service that the Company provides to help ensure Customer’s total satisfaction with the completed Order. To receive free revision the Company requires that the Customer provide the request within fourteen (14) days from the first completion date and within a period of thirty (30) days for dissertations.

Read moreThe Company is committed to protect the privacy of the Customer and it will never resell or share any of Customer’s personal information, including credit card data, with any third party. All the online transactions are processed through the secure and reliable online payment systems.

Read moreBy placing an order with us, you agree to the service we provide. We will endear to do all that it takes to deliver a comprehensive paper as per your requirements. We also count on your cooperation to ensure that we deliver on this mandate.

Read more
The price is based on these factors:

Academic level

Number of pages

Urgency