Problem Set 3 Due 1.24.24的副本

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Feb 20, 2024

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Corporate Finance PBPL28683/PPHA 34410 Problem Set 3 Due Wednesday January 24, 2024 11:59PM CST Submit via Gradescope 90 Points 1. Which of the following statements violate the law of one price? Briefly explanation why (10 pts.) a. You just bought 1000 shares of MSFT at $371.00 per share from a broker in Chicago and simultaneously sold the those shares to a London broker at $372.00 per share, including all expenses. b. You invested $1,000,000 in a $10 million revenue company in a niche market. You believed that your investment will be worth $5,000,000 in a few years at the time you invested. You sell your investment for $8,000,000 five years later. c. As a market maker, you traded one billion notional amount (the value of the underlying currency the option allows you to buy or sell) of currency options today and made a net profit after all expenses of $250,000. d. You bought 100 oz. of gold from a dealer in London at $2040/oz. and simultaneously sold the gold to a bullion dealer in New York at $2041/oz. Assume your expenses for the two trades are $1.10/oz. 2. You own the common stock of Grid Batteries Inc. Grid will pay its first annual dividend of $8.00 one year from today. Grid’s dividends are predicted to grow by 20% per annum thereafter. If this prediction is correct, what is the present value of the dividend stream of this company? Assume the appropriate discount rate is 30% annually. If these assumption are correct what do you expect the stock price of Grid to be today? (10 pts.) 3. Given the following, calculate the remaining number: (10 pts.) a. If the nominal five year interest rate is 4.0% annually, and the inflation rate for five years is expected to be 6.0% annually, what is the expected five year real rate of return on an annual basis? b. If the real rate of return for the next year is 2.0% and the inflation rate is expected to be 4.0%, what is the nominal one year rate of interest? c. If the one year expected inflation rate is 7.0% and the nominal interest rate is 5.5% what is the real rate of return for the next year? 4. Given the following, a company issues a one year zero coupon bond with the following expected return profile. What is the most that you should pay for it? (10 pts.) o Risk free rate: 6% per annum o Expected repayment on a $1000 face value note in one year, with the expected probability of that payout: Amount Probability $1000 40% $600 25% $300 25% $100 10%
5. The available bids and offers for Advanced Micro Devices are shown on the following table. You are an institutional investor: (10 pts.) Limit order: Buy or Sell Amount Available Price per Share Sell 500 $139.25 Sell 100 $139.00 Sell 300 $138.75 Buy 300 $138.50 Buy 200 $138.25 Buy 400 $138.00 Advanced Micro Devices What would your average price per share be, using market orders, if you need to: a. buy 400 shares? b. buy 600 shares? c. sell 350 shares? d. sell 800 shares? 6. Apple Computer’s (AAPL) most recent annual dividend rate was $0.96/share. The recent market price was $184.00 per share. (10 pts.) a. Compute AAPL’s expected price using the dividend model with no growth and a discount rate of 8.0% annually. Does AAPL appear to be relatively expensive or cheap using the dividend model? Why might the market price be correct and the answer you derived incorrect? b. Now use the dividend discount model with growth to calculate AAPL’s price, given a growth rate of 7.5% annually and the same discount rate above. Does AAPL appear to be relatively expensive or cheap using the dividend discount model with growth? Does this model seem more or less realistic than the no-growth model? 7. Given the following information, calculate the PVGO for the following companies: (10 pts.) a. Apple Computer (AAPL): Price = $184.00/share; Annual EPS = $6.12; discount rate 8% per annum b. Exxon Mobile: (XOM): Price = $100.00/share; Annual EPS = $10.05; discount rate 5% per annum c. What do the PVGO numbers say about the market’s belief in the prospects for earnings growth at these two companies? Briefly give your reasoning.
8. Given the following facts, calculate the horizon value and stock price for Apple Computer as of the year end of 2023. Assume that all earnings are paid as a cash dividend at the end of each year. (10 pts.) 8% annual discount rate Earnings 2028 and beyond : $12.00/share. Earnings for the full year 2024 through 2027: $6.12, $8.90, $10.00, $11.00 Assume the date of the valuation is December 31, 2023 and that earnings equal free cash flow. Given the current price of the stock is around $184.00 per share, would you consider it a buy or a sell? Briefly give your reasoning. 9. Given the following facts, calculate the horizon value and stock price for Exxon Mobile Corporation as of the year end of 2023. Assume that all earnings are paid as a cash dividend at the end of each year. (10 pts.) 5% annual discount rate Earnings 2028 and beyond : $6.50/share Earnings for the full year 2024 through 2027: $10.07, $9.50, $8.00, $7.50 Assume the date of the valuation is December 31, 2023 and that earnings equal free cash flow. Given the current price of the stock is around $100.00 per share, would you consider it a buy or a sell? Briefly give your reasoning.
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