EBK PRINCIPLES OF CORPORATE FINANCE
EBK PRINCIPLES OF CORPORATE FINANCE
12th Edition
ISBN: 9781259358487
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 22, Problem 7PS

Expansion options Look again at Table 22.2. How does the value in 1982 of the option to invest in the Mark II change if

  1. a. The investment required for the Mark II is $800 million (vs. $900 million)?
  2. b. The present value of the Mark II in 1982 is $500 million (vs. $467 million)?
  3. c. The standard deviation of the Mark II’s present value is only 20% (vs. 35%)?
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An individual is investing in a market where spot rates and forward rates apply. In this market, if at time t=0 he agrees to invest £5.3 for two years, he will receive £7.4 at time t=2 years. Alternatively, if at time t=0 he agrees to invest £5.3 at time t=1 for either one year or two years, he will receive £7.5 or £7.3 at times t=2 and t=3, respectively. Calculate the price per £5,000 nominal that the individual should pay for a fixed-interest bond bearing annual interest of 6.6% and is redeemable after 3 years at 110%. State your answer at 2 decimal places.
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