Example 12.1Suppose that the 3-year interest rate is 6% with continuous compounding. Thismeans that 1,000e 0.06x3 = $835.27 will grow to $1,000 in 3 years. The differencebetween $1,000 and $835.27 is $164.73. Suppose that a stock portfolio is worth$1,000 and provides a dividend yield of 1.5% per annum. Suppose further that a3-year at-the-money European call option on the stock portfolio can be purchasedfor less than $164.73. (From DerivaGem, it can be verified that this will be thecase if the volatility of the value of the portfolio is less than about 15%.) A bankcan offer clients a $1,000 investment opportunity consisting of:1. A 3-year zero-coupon bond with a principal of $1,0002. A 3-year at-the-money European call option on the stock portfolio.If the value of the porfolio increases the investor gets whatever $1,000 invested inthe portfolio would have grown to. (This is because the zero-coupon bond paysoff $1,000 and this equals the strike price of the option.) If the value of theportfolio goes down, the option has no value, but payoff from the zero-couponbond ensures that the investor receives the original $1,000 principal invested.

ExplanationThe solution begins by determining the present value of a zero-coupon bond needed to grow…

Answered: Example 12.1 Suppose that the 3-year…

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)

10th Edition

ISBN:9781337902571

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter9: Stocks And Their Valuation

Section: Chapter Questions

Problem 5TCL

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A3) Finance Suppose that the risk-free interest rate is 10% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create?
Suppose DO = $2.00. rs= 9%, What if g = 30% the first year, 20% the second year, and 10% the third year, and return to its long-run constant growth rate of 4%, Calculate the value of the stock today? O $62.7846 O $55.5021 O $60.3211 O $65.7223 O $72.3487
Suppose Dragons, Inc. is expected to pay an annual dividend of $0.85 at t=1. Thereafter the dividend will increase at a growth rate g = 25% for two years, and at a growth rate g = 3% after two years. What should you pay for the stock at t=0 if the appropriate discount rate is 8%? Group of answer choices 24.47 18.98 27.47 34.67
A corpus expected to pay a dividend of $1.25 per share at the end of the year (D1=$1.25). the stock sells for 27.50 per share and it's required return is 9.75 the dividend is expected to grow at some constant rate forever. what is the equilibrium expected growth rate?
Suppose the stock price is $ 95 and the continously compounded interest rate is 7 %. a) What is the price of a 6 - month forward price, assuming dividends are zero? $ ? b) If the 6 - month forward price is $ 96.55, what is the annualized forward premium? % ? c) If the 6 - month forward price is $ 96.55, what is the annualized continous dividend yield? % ?
3.
9) see picture
Suppose Facebook Inc. currently pays $1 dividend. Analysts project that the dividend for the next three years will be $1, $2, and 5$. After that the annual dividend is predicted to grow at 5% per year. Investors require a 10% rate of return. What is the value of one share of Facebook stock under these assumptions?
Suppose that the risk-free interest rate is 6% per annum with continuous compounding and that the dividend yield on a stock index is 4% per annum. The index is standing at 400, and the futures price for a contract deliverable in four months is 405. What arbitrage opportunities does this create?
6. Suppose that the simple annual returns on an investment over a 3-year period are: 8%, 2%, and 12%. What is the closest to the annualised holding period return? (a) 22.0% (b) 7.25% (c) 7.33% (d) 23.4% 7. A stock is currently trading at 20. Assume that at the end of one month it will either be 23 or 17. The risk-free interest rate is 5% per annum. The value of an ATM put option with a maturity of 1 month is closest to (a) 0.55 (b) 0.95 (c) 1.45 (d) 3.00
11. Consider $10m invested in a stock. The annual volatility of the rate of return is 25%. Assuming that the return is IID and normally distributed with p=0. a. What is the 99% 1-day VAR? b. What is the 95% 1-day VAR? c. What is the 95% one-week VAR? d. What is the 95% 1-day ES? e. What is the 99% 10-day ES?
Consider the following two stocks: Stock A is expected to provide a dividend of $10 for 15 years. After that, the dividend will grow at a rate of 2% forever. Stock B is expected to pay a dividend of $5 next year. Thereafter, dividend growth is expected to be 3% per 20 years and zero therafter. If the rate r at which dividends are discountd is r= 9%, which stock is the most valuable? What if the capitalization rate is 6%

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