This website uses cookies to ensure you have the best experience.

# Problem Based On Chapter 26 – Modigliani & Miller Extension Models With Growth Assumptions

516 words - 3 pages

FIN-516 – WEEK 3 HOMEWORK PROBLEMS

Problem No. 1 on Options based on Chapter 8
A Call Option on the stock of XYZ Company has a market price of \$9.00. The price of the underlying stock is \$36.00, and the strike price of the option is \$30.00 per share. What is the Exercise Value of this Call Option? What is the Time Value of the Option?
Price of stock is 36 – Strike price 30 = 6 value of the call option.
9 market price of call option – 6 value of the call option = 3 time value of the option.

Problem No. 2 on Options based on Chapter 8
The Exercise (Strike) Price on ABC Company’s Option is \$21.00, its Exercise Value is \$23.00, and its Time Value is \$7.00. What is the Market Value of the Option? ...view middle of the document...

5 = 20
60m -20m = 40million
Problem on Swaps based on Chapter 23
Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR + 1.5%, and it can issue fixed-rate debt at 9.4%.

Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A.

What are the resulting net payments of A and B?

Company A fixed payment 7.95%
The payment of LIBOR is made by company B
Company A still pays the +1%
Company A makes a net payment of 8.95%

Company B pays the LIBOR
Company A pays 7.95% of the 9.4%, this leaves company B with 1.45% left.
Company B is left with LIBOR + 1.45

Problem based on Chapter 23 – Futures Contract
What is the implied interest rate yield on a Treasury Bond (\$100,000) futures contract that settled at 100’24 (or 100 24/32)? If interest rates increased by 0.75%, what would be the contract’s new value?

Assume that this is based on 20 Years, with an annual yield of 8%, with semi-annual payments.

\$1,000 X (100+24/32)/100 = 1007.5
N = 40
I/Y = 8%
PV = 1007.5
FV = 1000
PMT = 40
INFORMATION POSTED FROM EXCELL
3.962%
2
0.079246392
100
7.92%
0.75
8.674639191
4.337319596
-936.5167498
0.9365
100,000
93,651.67

## Other Essays Like Problem Based on Chapter 26 – Modigliani & Miller Extension Models with Growth Assumptions

### Free Cash Flow Essay

5188 words - 21 pages , Moureonen and Noor Azlan Ghazali for their valuable comments. 95 Gadjah Mada International Journal of Business, January-April 2005, Vol. 7, No. 1 Introduction Most of macroeconomic theory is based on the idea of perfect capital markets, that is, smooth functioning of financial systems that justifies abstraction from financial considerations. Beginning with the seminal work of Modigliani and Miller (1958), the idea that financial

### Capital Structure Essay

1212 words - 5 pages In 1958, Franco Modigliani and Merton Miller revolutionized the whole area of corporate finance with their article “The cost of capital, corporate finance and the theory of investment”. Before Modigliani’s and Miller’s article, literature on the topic mainly focused on descriptions of methods and institutions. Theoretical analysis was very rare (Pagano 2008). Under the assumption of perfect capital markets, the Modigliani-Miller Proposition I

### The Optimal Capital Structure According to the Static Trade- Off Theory

2581 words - 11 pages based on balancing the expected costs from financial distress against the tax benefits of debt service payments, as shown in the chart below. Unlike the Modigliani and Miller proposition of no optimal capital structure, or a structure with almost all debt when the tax shield is considered, static trade- off theory puts forth an optimal capital structure with an optimal proportion of debt. Optimal debt usage is found at the point where any

### Gainesboro Dividend Case Study

2938 words - 12 pages dividend clientele hypothesis. Journal of Public Economics, 49(3), 261-285. Retrieved from http://www.sciencedirect.com.ezp01.library.qut.edu.au/science/article/pii/004727279290069R# Appendices Appendix 1: Detailed Calculation of Unused Debt Capacity (0%, 20%, 40% and residual payout) The items are assumed based on the exhibits given for this report. Items | Percentage | Tax rate | 40% | Interest | 6% | Max debt | 40% | Assumptions

### Chapter 1 Test

795 words - 4 pages Apply Difficulty: 2 Medium Learning Objective: 01-01 Define economics and the features of the economic perspective. McConnell - Chapter 01 #26 Topic: Economics; economic perspective | | | | | * Question 5 1 out of 1 points | | | In constructing models, economists:Answer | | | | | Selected Answer: |   make simplifying assumptions. | Correct Answer: |   make simplifying assumptions. | Response Feedback: | correct

### Empirical Corporate Finance

3439 words - 14 pages Empirical Corporate Finance * Table of Content Table of Content i 1 The Porsche Takeover 1 2 FPL Case 3 2.1 Expected Reaction of Stock Price 3 2.1.1 The Modigliani/Miller Theorem 3 2.1.2 The Tax Theory of Dividends 4 2.1.3 The Signaling Theory of Dividends 5 2.1.4 Agency Costs 5 2.1.5 Theory of Dividends Based on Tax Clienteles 6 2.2 Chart in the Light of Previous Theories 7 3 Elton and Gruber (1970): “Marginal

### Airline Financial Aquisition

2726 words - 11 pages capital. Delta can achieve this financial objective by obtaining more debt financing in the capital structure. Based on Delta’s financial analysis, Delta’s weighted average cost of capital (WACC) is approximately 6.75%, which is in proportion to the market values of equity and debt. According to Modigliani and Miller, “It is essential to note that the lower the WACC, the higher the market value of the company. Hence, if we can change the capital

### Teachings Note California Pizza Kitchen

2421 words - 10 pages issues regarding the capital structure decision at CPK. End with a class vote on the alternatives. 2. Maybe we can all be right. Is there a case for that? This question is designed to introduce a discussion of the Modigliani-Miller value irrelevance of capital structure decisions. 3. How does debt add value to CPK? This question allows the class to go through the concepts and mechanics of leverage and debt tax shields

### Financial Theory Summaries

2688 words - 11 pages equity increases|added to risk of investment |\$200 million dollars in revolving | | |with the firm’s market value |(Miller, 2002). |credit, when the firm received a | | |debt-equity ratio (Miller, 2002). |As the fraction of the firm |risk premium of 8.9% on an | | |While debt itself maybe cheap

### Dividend Policy

2459 words - 10 pages earning to make scrip dividends, special dividends, share repurchase and non–pecuniary benefits. In 1961, Modigliani and Miller (MM) argue that, given perfect and efficient markets, the pattern of dividend payments by a business have no effect on shareholder wealth. The only way to maximum shareholder wealth is investment with a positive NPV. So depend on M&M theory, Atrill (2000) agrees that to pay a lower dividend will simply be compensated by

### Long Run Forecast of the Covariance Matrix

5165 words - 21 pages the techniques is based on primary assumptions of constant variance i.e. homoscedastic e.g. AMA models, or non-constant variance i.e. heteroscedastic or time-varying e.g. GARCH models. The GARCH i.e. Generalized ARCH models introduced past conditional volatility as an explanatory variable of the forecast volatility in addition to volatility new that was already a part of the original ARCH model. The GARCH models have become the most widely used

## Related Papers

### The Impact Of War With Iraq On The Us Economy, Based On An Article From Business Week

1513 words - 7 pages going to happen. People are nervous and spent less on consumption, because they do not know what the future will bring. Along the same line, are many companies reluctant to make investments and expand because of the many uncertainties they are faced with. The most significant problem in this context is the potential increase in crude oil prices, which, if they occur, will have a significant impact on many businesses. We must keep in mind that

### Social Psychologists Have Found That When People Are Asked To Make Judgements About A Particular Issue Or Problem These Judgements Are Different Depending On Whether They Are Made Alone Or With Other...

2328 words - 10 pages Social psychologists have found that when people are asked to make judgements about a particular issue or problem these judgements are different depending on whether they are made alone or with other people. Discuss the strengths and weakness of Cultural Value and Informational Influence explanations of this phenomenon. Many conflicts happen as a result of groups sharing and supporting only opinion of like-minded others in the group. Such

### Between 1953 61 Us Soviet Relations Were Based On Confrontation Rather Than Co Existence. How Far Do You Agree With This View?

1666 words - 7 pages manoevre, very much leaving the Soviets with the next move which could certainly have been an attack on these tanks. It is therefore clear to see that in this period the USA were still particularly confrontational. The methods in which these confrontations were shown changed however, mostly to espionage and the tough talking of Eisenhower and Dulles. However, to a certain extent, the 'New Look' policy served to aid co-existence between the two

### Capital Structure And Information Asymmetry Essay

3521 words - 15 pages as a basis to formulate new models. Although most of these assumptions were considered to be unrealistic, one cannot deny that they instigated debates and research in the realm of corporate structure theories that eventually led to the formulation of new models (Copeland, Weston and Shastri, 2005: 595). The central results of modern corporate finance, based on the Modigliani-Miller irrelevancy propositions, have been summarized nicely in the