Who reads financial statements? List at least three different categories of people. For each category, provide an example of the type of information they might be interested in and discuss why.
> Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far, your company has gone through three funding rounds: Currently,
> Do underwriters face the most risk from a best-efforts IPO, a firm commitment IPO, or an auction IPO? Why?
> What are some of the alternative sources from which private companies can raise equity capital?
> Consider again the electric car dealership in Section 22.3. Suppose the current value of a dealership is $5 million because the first-year free cash flow is expected to be $500,000 rather than $600,000. What is the beta of a corporation whose only asset
> A professor in the Computer Science department at United States Institute of Technology has just patented a new search engine technology and would like to sell it to you, an interested venture capitalist. The patent has a 17-year life. The technology wil
> In early 2012, General Electric (GE) had a book value of equity of $116 billion, 10.6 billion shares outstanding, and a market price of $17.00 per share. GE also had cash of $84 billion, and total debt of $410 billion. Three years later, in early 2015, G
> It is the beginning of September and you have been offered the following deal to go heli-skiing. If you pick the first week in January and pay for your vacation now, you can get a week of heli-skiing for $2500. However, if you cannot ski because the heli
> You are a financial analyst at Global Conglomerate and are considering entering the shoe business. You believe that you have a very narrow window for entering this market. Because of Christmas demand, the time is right today and you believe that exactly
> Describe the benefits and costs of delaying an investment opportunity.
> Using the information in Problem 2, rework the problem assuming you find out the size of the Everlasting Gobstopper market one year after you make the investment. That is, if you do not make the investment, you do not find out the size of the market. Con
> Consider the United Studios example in Section 22.2. Suppose United has the rights to produce the first film, but has not yet purchased the sequel rights. a. How much are the sequel rights worth to United? b. Suppose United can purchase the sequel rights
> Assume that the project in Example 22.5 pays an annual cash flow of $80,000 (instead of $90,000). a. What is the NPV of investing today? b. What is the NPV of waiting and investing tomorrow? c. Verify that the hurdle rate rule of thumb gives the correct
> Assume that the project in Example 22.5 pays an annual cash flow of $100,000 (instead of $90,000). a. What is the NPV of investing today? b. What is the NPV of waiting and investing tomorrow? c. Verify that the hurdle rate rule of thumb gives the correct
> Your firm is thinking of expanding. If you invest today, the expansion will generate $10 million in FCF at the end of the year, and will have a continuation value of either $150 million (if the economy improves) or $50 million (if the economy does not im
> Your engineers are developing a new product to launch next year that will require both software and hardware innovations. The software team requests a budget of $5 million and forecasts an 80% chance of success. The hardware team requests a $10 million b
> Genenco is developing a new drug that will slow the aging process. In order to succeed, two breakthroughs are needed: one to increase the potency of the drug, and the second to eliminate toxic side effects. Research to improve the drug’s potency is expec
> What was the change in Global Conglomerate’s book value of equity from 2014 to 2015 according to Table 2.1? Does this imply that the market price of Global’s shares increased in 2015? Explain. Table 2.1: GLOBAL C
> You own a cab company and are evaluating two options to replace your fleet. Either you can take out a five-year lease on the replacement cabs for $500 per month per cab, or you can purchase the cabs outright for $30,000, in which case the cabs will last
> What implicit assumption is made when managers use the equivalent annual benefit method to decide between two projects with different lives that use the same resource?
> You own a piece of raw land in an up-and-coming area in Gotham City. The costs to construct a building increase disproportionately with the size of the building. A building of q square feet costs 0.1 * q2 to build. After you construct a building on the l
> You are trying to decide whether to make an investment of $500 million in a new technology to produce Everlasting Gobstoppers. There is a 60% chance that the market for these candies will produce profits of $100 million annually, a 20% chance the market
> An original silver dollar from the late eighteenth century consists of approximately 24 grams of silver. At a price of $0.19 per gram ($6 per troy ounce), the silver content of the coin is worth about $4.50. Assume that these coins are in plentiful suppl
> You own a copper mine. The price of copper is currently $1.50 per pound. The mine produces 1 million pounds of copper per year and costs $2 million per year to operate. It has enough copper to operate for 100 years. Shutting the mine down would entail br
> You own a wholesale plumbing supply store. The store currently generates revenues of $1 million per year. Next year, revenues will either decrease by 10% or increase by 5%, with equal probability, and then stay at that level as long as you operate the st
> You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. JCH stock currently trades for $25 per share. Yo
> Repeat Problem 14, but this time assume that all the probabilities are risk-neutral probabilities, which means the cost of capital is always the risk-free rate and risk-free rates are as follows: The current interest rate for a risk-free perpetuity is 8%
> You are an analyst working for Goldman Sachs, and you are trying to value the growth potential of a large, established company, Big Industries. Big Industries has a thriving R&D division that has consistently turned out successful products. You estimate
> Consider the following potential events that might have taken place at Global Conglomerate on December 30, 2015. For each one, indicate which line items in Global’s balance sheet would be affected and by how much. Also indicate the change to Global’s boo
> Your R&D division has just synthesized a material that will super conduct electricity at room temperature; you have given the go-ahead to try to produce this material commercially. It will take five years to find out whether the material is commercially
> What decision should you make in Problem 2 if the one-year cost of capital is 15.44% and the profits last forever? Data from Problem 2: You are trying to decide whether to make an investment of $500 million in a new technology to produce Everlasting Go
> The management of Southern Express Corporation is considering investing 10% of all future earnings in growth. The company has a single growth opportunity that it can take either now or in one period. Although the managers do not know the return on invest
> Under the same assumptions as in Section 22.3, suppose your corporation owns an operating electric car dealership, together with one-year options to open five more. a. What is the value and beta of your firm if the expected first-year free cash flow for
> Your company is planning on opening an office in Japan. Profits depend on how fast the economy in Japan recovers from its current recession. There is a 50% chance of recovery this year. You are trying to decide whether to open the office now or in a year
> Hema Corp. is an all equity firm with a current market value of $1000 million (i.e., $1 billion), and will be worth $900 million or $1400 million in one year. The risk-free interest rate is 5%. Suppose Hema Corp. issues zero-coupon, one-year debt with a
> What is the highest possible value for the delta of a call option? What is the lowest possible value?
> Eagletron’s current stock price is $10. Suppose that over the current year, the stock price will either increase by 100% or decrease by 50%. Also, the risk-free rate is 25% (EAR). a. What is the value today of a one-year at-the-money European put option
> Suppose the option in Example 21.2 actually sold today for $5. You do not know what the option will trade for next period. Describe a trading strategy that will yield arbitrage profits. Example 21.2: Problem Suppose the current price of Narver Network
> Suppose the option in Example 21.1 actually sold in the market for $8. Describe a trading strategy that yields arbitrage profits. Example 21.1: Problem Suppose a stock is currently trading for $60, and in one period will either go up by 20% or fall by
> Find the most recent financial statements for Starbucks Corporation (SBUX) using the following sources: a. From the company’s Web page www.starbucks.com. b. From the SEC Web site www.sec.gov. c. From the Yahoo! Finance Web site finance.yahoo.com. d. From
> Using the information in Problem 3, use the Binomial Model to calculate the price of a twoyear European put option on Natasha stock with a strike price of $7. Data from Problem 3: The current price of Natasha Corporation stock is $6. In each of the nex
> The current price of Natasha Corporation stock is $6. In each of the next two years, this stock price can either go up by $2.50 or go down by $2. The stock pays no dividends. The one-year risk-free interest rate is 3% and will remain constant. Using the
> The J. Miles Corp. has 25 million shares outstanding with a share price of $20 per share. Miles also has outstanding zero-coupon debt with a 5-year maturity, a face value of $900 million, and a yield to maturity of 9%. The risk-free interest rate is 5%.
> You would like to know the unlevered beta of Schwartz Industries (SI). SI’s value of outstanding equity is $400 million, and you have estimated its beta to be 1.2. SI has four-year zero-coupon debt outstanding with a face value of $100 million that curre
> Consider the March 2010 $5 put option on JetBlue listed in Table 21.1. Assume that the volatility of JetBlue is 65% per year and its beta is 0.85. The short-term risk-free rate of interest is 1% per year. a. What is the put option’s lev
> Calculate the beta of the January 2010 $9 call option on JetBlue listed in Table 21.1. Assume that the volatility of JetBlue is 65% per year and its beta is 0.85. The short-term risk-free rate of interest is 1% per year. What is the optionâ€&#
> Explain why risk-neutral probabilities can be used to price derivative securities in a world where investors are risk averse.
> Explain the difference between the risk-neutral and actual probabilities. In which states is one higher than the other? Why?
> Using the information in Problem 3, calculate the risk-neutral probabilities. Then use them to price the option. Data from Problem 3: The current price of Natasha Corporation stock is $6. In each of the next two years, this stock price can either go up
> Using the information in Problem 1, calculate the risk-neutral probabilities. Then use them to price the option. Data from Problem 1: The current price of Estelle Corporation stock is $25. In each of the next two years, this stock price will either go
> Using the information on Harbin Manufacturing in Problem 19, answer the following: a. Using the risk-neutral probabilities, what is the value of a one-year call option on Harbin stock with a strike price of $25? b. What is the expected return of the call
> Using the information in Problem 1, use the Binomial Model to calculate the price of a oneyear put option on Estelle stock with a strike price of $25. Data from Problem 1: The current price of Estelle Corporation stock is $25. In each of the next two y
> Harbin Manufacturing has 10 million shares outstanding with a current share price of $20 per share. In one year, the share price is equally likely to be $30 or $18. The risk-free interest rate is 5%. a. What is the expected return on Harbin stock? b. Wha
> Consider again the at-the-money call option on Roslin Robotics evaluated in Problem 11. What is the impact on the value of this call option of each of the following changes (evaluated separately)? a. The stock price increases by $1 to $61. b. The volatil
> Consider the at-the-money call option on Roslin Robotics evaluated in Problem 11. Suppose the call option is not available for trade in the market. You would like to replicate a long position in 1000 call options. a. What portfolio should you hold today?
> Plot the value of a two-year European put option with a strike price of $20 on World Wide Plants as a function of the stock price. Recall that World Wide Plants has a constant dividend yield of 5% per year and that its volatility is 20% per year. The two
> Using the implied volatility you calculated in Problem 14, and the information in that problem, use the Black-Scholes option pricing formula to calculate the value of the 800 January 2014 call option. Data from Problem 14: Using the market data in Figu
> Using the market data in Figure 20.10 and a risk-free rate of 0.25% per annum, calculate the implied volatility of Google stock in September 2012, using the bid price of the 700 January 2014 call option. Figure 20.10: GOOG (GOOGLE INC) 700.77 – 5.3
> Using the data in Table 21.1, compare the price on July 24, 2009, of the following options on JetBlue stock to the price predicted by the Black-Scholes formula. Assume that the standard deviation of JetBlue stock is 65% per year and that the short-term
> Rebecca is interested in purchasing a European call on a hot new stock, Up, Inc. The call has a strike price of $100 and expires in 90 days. The current price of Up stock is $120, and the stock has a standard deviation of 40% per year. The risk-free inte
> Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from their cash flow statement: a. How much cash did Costco generate from operating activities in fisc
> Roslin Robotics stock has a volatility of 30% and a current stock price of $60 per share. Roslin pays no dividends. The risk-free interest is 5%. Determine the Black-Scholes value of a one year, at-the-money call option on Roslin stock.
> Consider the setting of Problem 9. Suppose that in the event Hema Corp. defaults, $90 million of its value will be lost to bankruptcy costs. Assume there are no other market imperfections. a. What is the present value of these bankruptcy costs, and what
> The current price of Estelle Corporation stock is $25. In each of the next two years, this stock price will either go up by 20% or go down by 20%. The stock pays no dividends. The one-year risk-free interest rate is 6% and will remain constant. Using the
> Which of the following positions benefit if the stock price increases? a. Long position in a call b. Short position in a call c. Long position in a put d. Short position in a put
> Explain the difference between a long position in a put and a short position in a call.
> Suppose that in July 2009, Google were to issue $96 billion in zero-coupon senior debt, and another $32 billion in zero-coupon junior debt, both due in January 2011. Use the option data in the preceding table to determine the rate Google would pay on the
> Use the option data from July 13, 2009 in the following table to determine the rate Google would have paid if it had issued $128 billion in zero-coupon debt due in January 2011. Suppose Google currently had 320 million shares outstanding, implying a mark
> Below is an option quote on IBM from the CBOE Web site showing options expiring in October and November 2015. a. Which option contract had the most trades on that day? b. Which option contract is being held the most overall? c. Suppose you purchase one o
> Wesley Corp. stock is trading for $25/share. Wesley has 20 million shares outstanding and a market debt-equity ratio of 0.5. Wesley’s debt is zero-coupon debt with a 5-year maturity and a yield to maturity of 10%. a. Describe Wesley’s equity as a call op
> Suppose the S&P 500 is at 900, and it will pay a dividend of $30 at the end of the year. Suppose also that the interest rate is 2%. If a one-year European put option has a negative time value, what is the lowest possible strike price it could have?
> Suppose a firm’s tax rate is 35%. a. What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings? b. What effect would a $10 million capital expense have on this year’s earnings if the
> Suppose the S&P 500 is at 900, and a one-year European call option with a strike price of $400 has a negative time value. If the interest rate is 5%, what can you conclude about the dividend yield of the S&P 500?
> The stock of Harford Inc. is about to pay a $0.30 dividend. It will pay no more dividends for the next month. Consider call options that expire in one month. If the interest rate is 6% APR (monthly compounding), what is the maximum strike price where it
> Consider an American put option on XAL stock with a strike price of $55 and one year to expiration. Assume XAL pays no dividends, XAL is currently trading for $10 per share, and the one-year interest rate is 10%. If it is optimal to exercise this option
> Explain why an American call option on a non-dividend-paying stock always has the same price as its European counterpart.
> You are watching the option quotes for your favorite stock, when suddenly there is a news announcement. Explain what type of news would lead to the following effects: a. Call prices increase, and put prices fall. b. Call prices fall, and put prices incre
> Consider the data for IBM options in Problem 3. Suppose a new American-style put option on IBM is issued with a strike price of $155 and an expiration date of November 1st. a. What is the maximum possible price for this option? b. What is the minimum pos
> Suppose Amazon stock is trading for $500 per share, and Amazon pays no dividends. a. What is the maximum possible price of a call option on Amazon? b. What is the maximum possible price of a put option on Amazon with a strike price of $550? c. What is th
> In mid-February 2016, European-style options on the S&P 100 index (OEX) expiring in December 2017 were priced as follows: Given an interest rate of 0.40% for a December 2017 maturity (22 months in the future), use put-call parity (with dividends) t
> What is the difference between a European option and an American option? Are European options available exclusively in Europe and American options available exclusively in the United States?
> Consider the October 2015 IBM call and put options in Problem 3. Ignoring the negligible interest you might earn on T-bills over the remaining few days’ life of the options, show that there is no arbitrage opportunity using put-call parity for the option
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco had purchased additional equipment for $12 million at the end of 2013, and this equipment was depreciated by $4 million per year in 2014, 2015, and 2016.
> Explain the difference between an S corporation and a C corporation.
> It is October 5, 2015, and you own IBM stock. You would like to insure that the value of your holdings will not fall significantly. Using the data in Problem 3, and expressing your answer in terms of a percentage of the current value of your portfolio: a
> You own a share of Costco stock. You are worried that its price will fall and would like to insure yourself against this possibility. How can you purchase insurance against this possibility?
> A forward contract is a contract to purchase an asset at a fixed price on a particular date in the future. Both parties are obligated to fulfill the contract. Explain how to construct a forward contract on a share of stock from a position in options.
> Consider the October 2015 IBM call and put options in Problem 3. Ignoring any interest you might earn over the remaining few days’ life of the options: a. Compute the break-even IBM stock price for each option (i.e., the stock price at
> What position has more downside exposure: a short position in a call or a short position in a put? That is, in the worst case, in which of these two positions would your losses be greater?
> Explain the meanings of the following financial terms: a. Option b. Expiration date c. Strike price d. Call e. Put
> Reproduce Ideko’s balance sheet and statement of cash flows, assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (that
> Forecast Ideko’s free cash flow (reproduce Table 19.10), assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvement
> Forecast Ideko’s free cash flow (reproduce Table 19.10), assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvement
> Under the assumptions that Ideko’s market share will increase by 0.5% per year but that the projected improvements in net working capital do not transpire (so the numbers in Table 19.8 remain at their 2005 levels through 2010), calculat
> See Table 2.5 showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco repurchases 2 million shares each year from 2013 to 2016. What would its earnings per share be in years 2013–2016? (Assume Mydeco pays f
> Under the assumptions that Ideko’s market share will increase by 0.5% per year and that the forecasts in Table 19.8 remain the same, calculate Ideko’s working capital requirements though 2010 (that is, reproduce Table
> Under the assumption that Ideko’s market share will increase by 0.5% per year (and the investment and financing will be adjusted as described in Problem 3), you project the following depreciation: Using this information, project net i
> Under the assumption that Ideko market share will increase by 0.5% per year, you determine that the plant will require an expansion in 2010. The cost of this expansion will be $15 million. Assuming the financing of the expansion will be delayed according
> Assume that Ideko’s market share will increase by 0.5% per year rather than the 1% used in the chapter. What production capacity will Ideko require each year? When will an expansion become necessary (when production volume will exceed the current level b
> Use your answers from Problems 17 and 18 to infer the value today of the projected improvements in working capital under the assumptions that Ideko’s market share will increase by 0.5% per year and that investment, financing, and depreciation will be adj
> Using the APV method, estimate the value of Ideko and the NPV of the deal using the continuation value you calculated in Problem 13 and the unlevered cost of capital estimate in Section 19.4. Assume that the debt cost of capital is 6.8%; Ideko’s market s
