Q: You have an option to purchase all of the assets of the
You have an option to purchase all of the assets of the Overland Railroad for $2.5 billion. The option expires in nine months. You estimate Overland’s current (month 0) present value...
See AnswerQ: In Section 10-4 we considered two production technologies for a
In Section 10-4 we considered two production technologies for a new Wankel-engined outboard motor. Technology A was the most efficient but had no salvage value if the new outboards failed to sell. Tec...
See AnswerQ: Respond to the following comments. a. “You don’t
Respond to the following comments. a. “You don’t need option pricing theories to value flexibility. Just use a decision tree. Discount the cash flows in the tree at the company cost of capital.” b. “...
See AnswerQ: In binomial trees, risk-neutral probabilities are set to generate
In binomial trees, risk-neutral probabilities are set to generate an expected rate of return equal to the risk-free interest rate in each branch of the tree. What do you think of the following stateme...
See AnswerQ: Suppose you expect to need a new plant that will be ready
Suppose you expect to need a new plant that will be ready to produce turbo-encabulators in 36 months. If design A is chosen, construction must begin immediately. Design B is more expensive, but you ca...
See AnswerQ: You have an A-rated bond. Is a rise in
You have an A-rated bond. Is a rise in rating more likely than a fall? Would your answer be the same if the bond were B-rated?
See AnswerQ: Why is it more difficult to estimate the value at risk for
Why is it more difficult to estimate the value at risk for a portfolio of loans rather than for a single loan? Why did this pose a problem for rating agencies that needed to assess the risk of package...
See AnswerQ: Over the coming year Ragwort’s stock price will halve to $50
Over the coming year Ragwort’s stock price will halve to $50 from its current level of $100 or it will rise to $200. The one-year interest rate is 10%. a. What is the delta of a one-year call option...
See AnswerQ: Other things equal, would you expect the difference between the price
Other things equal, would you expect the difference between the price of a Treasury bond and a corporate bond to increase or decrease with a. The company’s business risk? b. The degree of leverage?
See AnswerQ: The difference between the value of a government bond and a simple
The difference between the value of a government bond and a simple corporate bond is equal to the value of an option. What is this option and what is its exercise price?
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