Applications of option pricing in corporate finance Option pricing is used in four major areas of corporate finance: • Real Options Suppose a company has a 1-year proprietary license to develop a software application for use in a new generation of wireless cellular telephones. Hiring programmers and marketing consultants to complete the project will cost $30 million. The good news is that if consumers love the new cell phones‚ there will be a tremendous demand for the software. The bad news
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Chapter 8 The Money Markets 8.1 Multiple Choice 1) Activity in money markets increased significantly in the late 1970s and early 1980s because A) of rising short-term interest rates. B) of regulations that limited what banks could pay for deposits. C) of both (A) and (B) of the above. D) of neither (A) nor (B) of the above. Answer: C 2) Money market securities are A) short-term. B) low risk. C) very liquid. D) all of the above. E) only (A) and (B) of the above. Answer: D 3) Money market instruments
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Bond - is defined as a long-term debt of a firm or the government set forth in writing and made under seal. Kinds of Bond 1. Government Bonds - are those issued by the government to finance its activities. 2. Corporate Bonds - are those issued by private corporations to finance their long -term funding requirements. Bonds as Distinguished from Stocks 1. A bond is a debt instrument while stock is an instrument of ownership. 2. Bondholders have priority over stockholders when payments
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Construction‚ Inc. Visit us at www.mhhe.com/b Stock price $40 Market value of firm $400‚000 Number of shares 10‚000 Earnings per share $4 Book net worth $500‚000 Return on investment 8% Pisa has not performed spectacularly to date. However‚ it wishes to issue new shares to obtain $80‚000 to finance expansion into a promising market. Pisa’s financial advisers think a stock issue is a poor choice because‚ among other reasons‚ “sale of stock at a price below book value per share can only depress
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Chapter 1 Discussion Questions 1. What advantages does a sole proprietorship offer? What is a major drawback of this type of organization? A major drawback is that there is unlimited liability to the owner. The advantage is simplicity of decision making and low organizational and operating costs. 2. What form of partnership allows some of the investors to limit their liability? Explain briefly. It allows some of the partners to limit their liability. With this arrangement‚ the partners
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Chapter 8 Valuing Bonds 8-1. A 30-year bond with a face value of $1000 has a coupon rate of 5.5%‚ with semiannual payments. a. What is the coupon payment for this bond? b. Draw the cash flows for the bond on a timeline. a. The coupon payment is: [pic] b. The timeline for the cash flows for this bond is (the unit of time on this timeline is six-month periods): [pic] 8-2. Assume that a bond will make payments every six months as
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Problem 8-3. For each of the following situations‚ the present value concept should be applied: 1. Your wealthy aunt just established a trust fund for you that will accumulate to a total of $100‚000 in 12 years. Interest on the trust fund is compounded annually at an 8% rate. How much is in your trust fund today? 2. On January 1‚ you will purchase a new car. The automobile dealer will allow you to make increasing annual December 31 payments over the following four years. The amounts
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Reading 8: • What exactly is the problem? What values and goals make it a problem? o The problem is that there are both cultural/behavioral and structural/economic causes to poverty. The cultural/behavioral approach places responsibility for poverty on the personal inadequacies of the poor‚ welfare in general‚ or the design flaws of welfare programs. The structural/economic approach places responsibility for poverty on the movement of manufacturing jobs from the cities to the suburbs and the
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Principles of Corporate Finance Comprehensive Case Questions Tire City‚ Inc. 1. Evaluate Tire City’s financial health. How well is the company performing? 2. Based on Mr. Martin’s prediction for 1996 sales of $28‚206‚000‚ and for 1997 sales of $33‚847‚000 and relying on the other assumptions provided in the Tire City case‚ prepare complete pro forma forecasts of TCI’s 1996 and 1997 income statements and year-end balance sheets. As a preliminary assumption‚ assume any new financing required will
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/MiddSuppose that in the coming year‚ you expect Exxon-Mobil stick to have a volatility of 42% and a beta of 0.9‚ and Merck ’s stock to have a volatility of 24% and a beta of 1.1. The risk free interest rate is 4% and the markets expected return is 12%. The cost of capital for a project with the same beta as Merck ’s stock is closest to: . | d. 12.8% | E[R] = Rf + Beta × Risk Premium = .04 + 1.1 × (.12 - .04) = .128 | Which stock has the highest total risk? | c. Exxon-Mobil since it has
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