The price of Time Squared Corp. stock will be either $80 or $95 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 6 percent and the current price of Time Squared Corp. stock is $85. What is the value of a call option if the exercise price is $75 per share?
C0 = $85 - [$75/(1 + 0.06)] = $14.25
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94.
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The price of Dimension, Inc. stock will be either $65 or $87 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 5 percent. Suppose the current price of Dimension stock is $70. What is the value of the call option if the exercise price is $70 per share?
$70 = [($87 - $65)/($87 - $70)]C0 + $65/(1 + 0.05); C0 = $6.26
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95.
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Rackin Pinion Corporation's assets are currently worth $1,260. In one year, they will be worth either $1,200 of $1,610. The risk-free interest rate is 5 percent. Suppose Rackin Pinion has an outstanding debt issue with a face value of $1,200. What is the current value of the firm's debt?
E0 = $1,260 - [$1,200/(1 + 0.05)] = $117.14
D0 = $1,260 - $117.14 = $1,142.86 |
96.
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Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye's assets is currently $1,350. Jim Tressell, the CEO, believes that the assets in the firm will be worth either $600 or $1,700 in a year. The going rate on one-year T-bills is 6 percent. What is the current value of the firm's debt?
$1,350 = [($1,700 - $600)/($1,700 - $1,000)] E0 + [$600/(1 + 0.06)] = $498.89
D0 = $1,200 - $498.89 = $851.11 |
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