A house in Melbourne has recently sold for$2.5 million. Renting an equivalent housecosts $250,000 per year (paid at year-end).The risk-free rate is 7.5% (annuallycompounded). Suppose the house can eitherincrease in price each year by 20% ordecrease by 20% before rent is paid out (i.e.cum-dividend). For example, the price canincrease from $2.5 million to $3.0 million, sothat after $250,000 rent is paid out (i.e. ex-dividend), the house is worth $2.75 million. i.What is the price of a 2-year at-the moneyAmerican call option on the house? State anyassumptions you need to make

The contract gives the right to the owner to buy the specific underlying securities at a pre-defined…

Answered: A house in Melbourne has recently sold…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Midlife Crisis Inc. (MCI) has two assets: epsilon1,60 in cash and an investment project. The cash is invested in the risk-free asset which earns 5% per year. The project requires an investment of £800 today and generates an expected cash flow of £1,600 one year from now. This opportunity recurs perpetually each year. Thus, for example, one year from now MCI can again invest £800 and generate epsilon1,600 one year subsequent to that investment. MCI has 800 shares outstanding. The market equity risk premium is 5% per year, and the investment project has a CAPM beta of 1. Assume a Modigliani and Miller world. When answering this question, state any additional assumptions you may need to make. Show your calculations. (a) Should MCI invest in the project? Explain. (b) Suppose MCI's CFO decides to pursue the project. What is the value of MCI? (c) Suppose MCI's CFO decides to take the project and always pay out all free cash flow as a dividend. What is MCI's cum-dividend price expected to be…
You are considering the purchase of an investment that would pay you $5,000 per year for Years 1-5, $3,000 per year for Years 6-8, and $2,000 per year for Years 9 and 10. If you require a 14%, and the cash flows occur at the end of each year, what is the modified internal rate of return if the initial outlay is $10,000 and the cash flows are reinvested at the required rate of return? 14% 23% 28% 46%
You are considering the purchase of real estate that will provide perpetual income that should average $54,000 per year. How much will you pay for the property if you believe its market risk is the same as the market portfolio’s? The T-bill rate is 6%, and the expected market return is 9.0%. Property Value =
You are preparing to produce some goods for sale. You will sell them in one year and you will incur costs of $86,000 immediately. If your cost of capital is 7.3%, what is the minimum dollar amount you need to sell the goods for in order for this to be a non-negative NPV? The minimum dollar amount is $. (Round to the nearest dollar)
What is the no arbitrage price of a risk-free investment that promises to pay $1,000 in one year? The risk-free interest rate is 3.5%. If you can purchase the investment for $950, do you have an arbitrage opportunity?
You have an opportunity to invest $50,600 now in return for $60,800 in one year. If your cost of capital is 7.9%, what is the NPV of this investment?
You are considering a project which will cost $140,000. It is expected to bring in incomes of $45,000 per year for the next 5 years. You company's discount rate is 12%. What is the NPV of this project?
12. You can purchase a office building for $1.7 million. You expect the cash flow on the building to be $95,000 next year and believe it will grow by 5% each year. You expect to hold the building for 5 years and then sell it for $2 million. What do you expect the yield 10 on the building to be? If your required rate of return is 10%, should you buy the building? If your answer is not the buy the building for $1.7 million, what price would you pay? If your answer is to buy the building, how much more could you pay?
Double your wealth. Kant Miss Company is promising its investors that it will double their money every 3 years. What annual rate is Kant Miss promising? Is this investment a good deal? If you invest $400 now and Kant Miss is able to deliver on its promise, how long will it take your investment to reach $32,000? Using the Rule of 72, what annual rate is Kant Miss promising? % (Round to the nearest whole percentage.)
An investment will pay $25 per year (indefinitely), starting in one year’s time. The annual payments will grow at a rate of 3% per year. If the price of this investment is $200, what is its rate of return?
Suppose you considering investing $33 to earn $5.9 every year for 9 years. If the annual interest rate is 4.8%, what is the payback of this project? Suppose you considering investing $22 to earn $4.0 every year for 7 years. If the annual interest rate is 3.4%, what is the payback of this project?
You have the opportunity to make an investment that costs $1.000,000. If you make this investment now, you will receive $250,000 one year from today, $200,000, $150,000 and 400,000 two and three years from today, respectively. The appropriate discount rate for this investment is 11 percent. .a. Should you make the investment?

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