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Black-Scholes Model

Derivative problems: Option Pricing

Please see the attached file. 1) Option pricing principles are now often used in corporate finance applications. It is common to look at equity in a corporation as an option. What type of option is equity similar to? Discuss what factors would affect the price of equity and in what direction based on this option pricing view.

ESO Plan

Incorporate an ESO plan into a company's valuation. For your company (Dell, Inc), incorporate the effect of the Employee Stock Option (ESO) plan into the common equity valuation. Be sure to consider both the forecasted ESO grants and outstanding ESOs. Perform your valuation in Excel; use appropriate formulas/equations.

Value option with Black-Scholes Option Pricing Model

Assume you have been given the following information on Purcell Industries: Current stock price = $15 Strike price of option = $15 Time to maturity of option = 6 months Risk-free rate = 6% Variance of stock return = 0.12 d1 = 0.24495 d2 = 0.00 N(d1) = 0.59675 N(d2) = 0.5000 Using

Equity and Debt Worth

Fethe Inc. is a custom manufacturer of guitars, mandolins, and other stringed instruments located near Knoxville, Tennessee. Fethe's current value of operations, which is also its value of debt plus equity, is estimated to be $5 million. Fethe has $2 million face-value zero coupon debt that is due in 2 years. The risk-free rate

Derivatives: Call option, Put option, Put-call parity

P15-16. Explain the following paradox. A put option is a highly volatile security. If the underlying stock has a positive beta, then a put option on that stock will have a negative beta (because the put and the stock move in opposite directions). According to the CAPM, an asset with a negative beta, such as the put option, has

Considering Executive Stock Options

Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 20,000 at-the-money European call options on Mountainbrook's stock, which is currently trading at $50 per share. Mountainbrook's stock pays no dividends. The options will expire in 4 years, and the annual

NPV/Black-Scholes

A company is considering a project with the following data: Initial Cost = $500,000 Cost of Capital = 12% Risk Free Rate = 5% Cash Flows occur for 3 years according to the following: Demand Probability Annual Cash Flow High .30 $270,000 Average

Portfolio Theory and CAPM in Decision Making

1. Why do financial mangers have difficulty applying CAPM in decision making? What benefits does CAPM provide them? 2. Explain why assets must be evaluated in a portfolio context

A Calculate the exercise value of the warrants if the price of the underlying stock is $40. b. How much would an investor likely be willing to pay for the warrant over and above its exercise value ? Why? c. Would the investor likely be willing to pay more or less for the warrant if the stock had a beta of 1.0? Why? d. Is a warrant more similar to a call option or a put option? Why? e. Why might an investor prefer to buy warrants rather than the underlying stock?

Orne Corporation issued bonds with detachable warrants several years ago. Each warrant allows the holder to purchase one share of stock at $30 per share. The stock has a beta of 1.6. a Calculate the exercise value of the warrants if the price of the underlying stock is $40. b. How much would an investor likely be willing

Healthcare related economics and accounting

1. For question 1 refer specifically and directly to attached Mclean c 2 2. For question 2 refer specifically and directly to attached Mclean c 3 We Will provide a rating after evaluation of responses 1. Explain how managed care contracts change agents' incentives to control costs. What agency costs are eliminated

Black Scholes

Find the Black-Scholes price for a Six month call option Euro100,000, strict price of $1.00/Euro100. Current Exchange Rate $1.25/Euro100. US risk free rate is 5% and Euro risk free is $4. Volatility of underlying asset is 10.7% I come up with Ce = .63577. Wondering if I'm correct. Thanks!

Interest Rate Swaps, Swap Pricing, and Other Derivative Assets

Swaps and Interest Rate Options - What is an interest rate swap? - How do you immunize using interest rate swaps? - What is a comparative advantage in credit market? - What is a currency swap? - What are interest rate collars, swaptions, and interest rate options? Swap Pricing - How swaps are priced? - How

Healthcare Management

The short article below concerns the firing of the CFO of a local hospital. What do you think about this story, especially what it infers about the responsibility of the CFO? Also, what is your opinion of the financial issues brought out in the story? Write a brief paragraph or two of 150 words total or less using MS word to c

Option Pricing Followup Questions

Can you give me some very brief answers to my questions? Option Pricing - What is the law of one price? - How do you determine lower and upper bounds? - How do you use put-call parity? - What is the binomial option-pricing model? - How do you calculate option premiums using the binomial pricing model and put-call par

C&G Corporation: Equity Method Accounting & Stock Options Expense

Please review the attached questions and help provide simple answers. 1. Assume that C&G Corporation acquires a 40% interest in an affiliate for $500 and accounts for this investment using the equity method. The affiliate reports the following summary balance sheet on the date of the acquisition:

Deferred Tax Accounting

Need help with the attcahed questions with respect to the attached 10k. --- 1. HP reports income tax expense of $699 million in its 2004 income statement and describes its income tax expense in Note 12 (pp. 121-124). a. The company reports that it increased its valuation allowance for deferred tax assets by $47 million. Wha

Recognition of Benefit plans: HP financial statement disclosures in the 10K

Please review the attached questions and 10k. I need simple, two line explanations for each. 1. HP provides disclosures related to its pension plans in Note 15 (pp. 129-135). Please answer the following questions based on your reading of this footnote. With respect to only the US Defined Benefit plans and only in 2004, pleas

NOPAT

1. Using the HP income statement on P85, a. Compute NOPAT for 2004 (4). NOPAT=Operating Income - Tax For Year 2004 NOPAT = $4,227-$699 = $3,528 million 2. Referring to HP's balance sheet (p 86), a. Compute HP's net operating assets (NOA) and net financial obligations (NFO) for 2004. (Hint: the computation is simpl

Pending litigation, special purpose entities

3. HP describes is pending litigation in note 17 (pp 136-143). Under what conditions can HP avoid recognition of these pending liabilities in its financial statements? 4. In its statement of stockholders' equity (p. 88), HP reports a cumulative translation adjustment (CTA) of $22 million, up from $2 million in 2003. a. Ass

NOPAT / Operating expense / NI and Cash Flow

Attached are 6 questions that I am struggling to answer. I am looking for quick bullet point answers and explanations on NOPAT / Operating Expense / Cash Flows and analyst issues. Please use the HP 10k for data. --- 1. Using the HP income statement on P85, a. Compute NOPAT for 2004. b. How would you justify treatin

Black-Scholes Option Pricing Model

Using the Black-Scholes model to determine the option price for the May 35 call for Chaseys as of April 18, 2005. The expiration date for this option was May 18, 2005. The annualized interest rate on a T-bill that matures that same day is 3.0%. Chasey's stock closed at $36. The historic variance for Chasey's is 0.25. Assume

Core Earnings and Quality of Earnings

Questions (also attached) 1. Describe the concept of "core earnings" as defined by Standard & Poor. What deficiencies in GAAP is this concept designed to remedy? In one paragraph, give your assessment of the usefulness of core earnings. 2. Describe the meaning of the phrase "quality of earnings" as it is currently used

Risk Management Policy, and Acquisition Analysis: ADM and Corn Products

Please see attached files. I need help with part e of section 2. I have no idea on how to decide on the pricing and financing: e. This report should clearly identify the following: 1) Your proposed acquisition terms 2) Price 3) Financing 4) Potential negotiation strategies I can calculat

Finance

I have no idea how to find out the answer.

Analyzing Stocks and Bonds, Leverage, Option Pricing

Problem 2. Bond and Stock Values This problem has three parts. 2a. A certain bond has a face (par) value of $10,000.00 and pays a coupon of $100 annually. The current rate of interest on similar bonds is 12%. The bond is a 10 year maturity. What is a fair price for the bond in the bond market?

Project: volatility smiles in options markets

This project is about volatility smiles in options markets. I need to collect recent two years' daily or weekly data and generate the volatility smiles, discuss the changes and explain why those changes have taken place. I have done some reading and writing on the literature side of the volatility smiles but I still have some