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Snyder Telecommunication Company is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate. Suggest two areas where the use of futures contracts are most common. What percent of the value of the underlying security is typical as a down payment in a futures contract?

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I.
Snyder Telecommunication Company is trying to decide whether to increase its cash dividend immediately or use the funds to increase its future growth rate.

D0 is currently $3.00, Ke is 10%, and g is 5%.
Under Plan A, D0 would be immediately increased to $3.40 and Ke and g will remain unchanged.
Under Plan B, D0 will remain at $3.00 but g will go up to 6% and Ke will remain unchanged.

a. Compute P0 (price of the stock today) under Plan A. Note D1 will be equal to
Ke will equal 10% and g will equal 5%.

b. Compute P0 (price of the stock today) under Plan B. Note D1 will be equal to
Ke will be equal to 10% and g will be equal to 6%.

c. Which plan will produce the higher value?

II.
Suggest two areas where the use of futures contracts are most common. What percent of the value of the underlying security is typical as a down payment in a futures contract?

III.
You buy a stock option with an exercise price of $50. The cost of the option is $4. If the stock ends up at $56, indicate whether you have a profit or loss with a call option? With a put option?

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Tutorial is 229 words plus computations for you. No references.

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