Questions from Corporate Finance

Q: Now suppose the firm finances the project by issuing debt that has

Now suppose the firm finances the project by issuing debt that has lower priority than existing debt. How much must a $1, $10, or $25 project be worth if the shareholders are willing to fund it?

Q: Consider the widget investment problem of Section 17.1 with the

Consider the widget investment problem of Section 17.1 with the following modification. The expected growth rate of the widget price is zero. (This means there is no reason to consider project delay.)...

Q: What is Pr(St > $105) for t =

What is Pr(St > $105) for t = 1? How does this probability change when you change t? How does it change when you change σ?

Q: Assume that the market index is 100. Show that if the

Assume that the market index is 100. Show that if the expected return on the market is 15%, the dividend yield is zero, and volatility is 20%, then the probability of the index falling below 95 over a...

Q: Suppose that ln(S) and ln(Q) have

Suppose that ln(S) and ln(Q) have correlation ρ =−0.3 and that S(0) = $100, Q(0) = $100, r = 0.06, σS = 0.4, and σQ = 0.2. Neither stock pays dividends. Use equation (20.38) to find the price today of...

Q: Verify that equation (23.7) satisfies the appropriate boundary

Verify that equation (23.7) satisfies the appropriate boundary conditions for Pr(ST≤ H and ST >K).

Q: Consider Joe and Sarah’s bet in Examples 21.2 and 21

Consider Joe and Sarah’s bet in Examples 21.2 and 21.3. a. In this bet, note that $106.184 is the forward price. A bet paying $1 if the share price is above the forward price is worth less than a bet...

Q: Suppose that the stock price follows a jump-diffusion process as

Suppose that the stock price follows a jump-diffusion process as outlined in Section 20.7. Let the jump intensity be λ = 0.75, the expected jump exp(αJ), with αJ =−0.15, and let the jump volatility be...

Q: The quanto forward price can be computed using the risk-neutral

The quanto forward price can be computed using the risk-neutral distribution as E(Yx−1). Use Proposition 20.4 to derive the quanto forward price given by equation (23.30).

Q: Use the following inputs to compute the price of a European call

Use the following inputs to compute the price of a European call option: S = $50, K = $100, r = 0.06, σ = 0.30, T = 0.01, δ = 0. a. Verify that the Black-Scholes price is zero. b. Verify that the vega...