Hilltop stock has a current market price of $63 a share. The 1-year $60 call is priced at $8.75 while the 1-year $60 put is priced at $3.42. What is the risk-free rate of return? Group of answer choices 4.04% 3.61% 4.62% 3.11%

Hilltop stock has a current market price of $63 a share. The 1-year $60 call is priced at $8.75 while the 1-year $60 put is priced at $3.42. What is the risk-free rate of return? Group of answer choices 4.04% 3.61% 4.62% 3.11%

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 10P

See similar textbooks

Related questions

Q: Calculate the 1. payback period, 2. the net present value to the nearest whole dollar (for example…

A: Note : As per guidlines we can solve only three sub parts so kindly post other parts separately.NPV…

Q: Tayzor Guitars has a bond outstanding with a coupon of 10 percent with semiannual payments and a…

A: Bonds refer to instruments that are issued by a company to raise debt capital from non-traditional…

Q: Find the value of the ordinary annuity at the end of the indicated time period. The payment R,…

A: We need to use future value of ordinary annuity formula to calculate future value.. Where FV =…

Q: You purchase a home for $434,000 by making a down payment of 15% and financing the remaining amount…

A: A mortgage refers to a covered loan that is borrowed for the purchase of a property, which itself…

Q: Use Table 7. Assume company 1 and company 3 are in the tech sector and company 2 is in the consumer…

A: Average P/E = (19.7+17.2) / 2 = 18.45Average P/BV = (7.5+6.7)/2 = 7.1Average P/S = (2.5+2.7)/2 =2.6

Q: determine the amount of the translation exposure in dollars if the Yen depreciates by 10% from…

A: In current method all asset and liability except Equity is translated at current rate.

Q: You want to create a portfolio equally as risky as the market, and you have $500,000 to invest.…

A: Investment in stock A: $138,000Investment in stock B: $142,000Beta of stock A: 0.83Beta of stock B:…

Q: Finch, Incorporated, is debating whether or not to convert its all-equity capital structure to one…

A: Cash flow from operations represents the money received or spent by a business during regular…

Q: Suppose Logan Inc. has earnings per share of $3.45 and EBITDA of $45 million. Logan Inc. also has 5…

A: Enterprise value =Multiple * EBITDA.=7∗$45=$315Million

Q: A year ago, an investor bought 500 shares of a mutual fund at $7.56 per share. This year, the fund…

A: Return for the year =Change in price +Dividend + CG…

Q: Fraser Company will need a new warehouse in eight years. The warehouse will cost $430,000 to build.…

A: Pvf@i = 1/(1+i)^ni= interest raten= number of yearPresent Value= Cash flow * Pvf@i

Q: Avicorp has a $11.5 million debt issue outstanding, with a 5.8% coupon rate. The debt has…

A: A company raises its capital in two main forms – debt and equity. Debt issue can consist of…

Q: stions Assume that you manage an $11.00 million mutual fund that has a beta of 1.25 and a 9.50%…

A: Market risk Premium= (Required return - RiskFree rate) / Beta= (9.50%-2.20%)/1.25= 5.84%

Q: Maxwell Corp. is coming to the market with a new offering of 300,000 shares, at $25 to the public.…

A: New shares offered: 300,000Issue price: $25Amount received per share: $22Current share:…

Q: Daniel Sawyer, the CEO of the Sawyer Group, is initiating planning for the company's operations next…

A: AFN, which stands for "Additional Funds Needed," signifies the capital a company must secure…

Q: investments next year. The net income this year is $1,958. Find the amount of new debt that Posh…

A: Debt-equity ratio evaluates how much debt and equity a company uses to finance its operations and…

Q: [cname] issued a 8-year bond that gives a 7.2% annual return. The 7.2% annual return is called…

A: The correct answer to the question is coupon rate.The annual rate of return given on bond is the…

Q: The following is the capital structure of your company. Debt: 12,000 bonds. 6.1 annual% coupon, with…

A: WACC refers to weighted average cost of capital. It is the blended cost of capital. Capital is…

Q: A stock just paid a dividend of $2.41. The dividend is expected to grow at 25.68% for three years…

A: Stock value refers to the price of the stock at which the stock are being traded in the market which…

Q: A closed- end fund has total assets of $397,000,000 and liabilities of $640,000. There are 13…

A: Net Asset Value(NAV)== $ 396,360,000/ $ 36,000,000= 11.01Premium / Discount Percentage=-10.54%i.e.…

Q: Suppose an investment is equally likely to have a 24% retu - 8% return, or a 6% return. The expected…

A: r1=24%r2=-8%r3=6%All equal likely

Q: American Water Works has an issue of preferred stock outstanding with a coupon rate of 5.00 percent…

A: In the given case, we have provided the par value or the face value of the preferred stock, selling…

Q: e forecast for Global Exports’ free cash flows for next year is provided in the table below.…

A: Share price:A share price, also known as stock price, is the current price at which a company’s…

Q: Suppose the U.S. yield curve is flat at 5% and the euro yield curve is flat at 3%. The current…

A: We have,U.S. yield Curve = 5%Euro Yield Curve = 3%Exchange Rate = $1.25 per EuroAmount of Swap…

Q: Bozo borrowed $15,000 from Ernie due in 5 years at 6% compounded monthly. Immediately after the debt…

A: Borrowed amount = $15,000Interest rate = 6% (Compounded monthly)Number of years = 5 yearsInterest…

Q: A stock has an expected return of 12.6 percent and a beta of 1.17, and the expected return on the…

A: Expected return = Risk free rate + Beta *(Expected market return - Risk free rate).

Q: You have the following information about Burgundy Basins, a sink manufacturer. Equity shares…

A: Internal rate of return =After tax cash flow (ATCF) /Cost of investment.=$4.50million/$30=15.00%

Q: On January 7, 2023, $4000 was deposited into an account which earns 5% annually. Assuming simple…

A: Simple interest refers to the interest that is earned on the invested amount periodically, it is not…

Q: c. Accounts receivable at the beginning of the year are $335. The company has a 30-day collection…

A: Accounts receivables can be referred as the record of debtors from whom the cash for making sales of…

Q: Asume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the…

A: Return for Stock A =1.5%+1.2*(10%-1.5%) =11.70%Return for Stock B =1.5%+0.5*(10%-1.5%) =5.75%Return…

Q: Consider a stock that has a Beta of 0.85. You expect the long-term return on the market to be 9.75%…

A: CAPM is also known as capital asset pricing model. It helps in know the expected return on the…

Q: Total common equity Total liabilities and equity Sales Operating costs excluding depreciation EBITDA…

A: Free cash flow is money available after making payments adding depreciation making deduction for…

Q: If the net inflow of one currency is about the same amount as a net outflow in another currency, the…

A: Transaction exposure can be measured by calculating the impact of changes in foreign exchange rates…

Q: c. The internal rate of return is between what two whole discount rates (e.g., between 10% and 11%,…

A: Net Present Value:It is a method used in capital budgeting to determine the absolute profitability…

Q: Wicked VR Co. has a WACC of 1.75% and is considering a project with the following Year O Year 1…

A: Formula for payback period is :Year before break even point is achieved + Amount still to be…

Q: Use the table for the question(s) below. Consider the following covariances between securities:…

A: Weight of investments in duke energy= (4000 / (4000+5000) = 0.444444444444444Weight of investment…

Q: Occam Industrial Machines issued 145,000 zero coupon bonds six years ago. The bonds have a par value…

A: Zero coupon bonds are bonds that are not paid any coupon but only par value is paid on maturity of…

Q: The futures price for an asset is $60. Expiration is in 3 months, and the risk free rate is 4%. If…

A: Arbitrage is the practice of simultaneously buying and selling an asset in different markets to take…

Q: (US dollars in thousands) Assets Current assets Cash and cash equivalents Accounts receivable Cobalt…

A: The company's liquidity position can be determined by using following ratios such as:Current…

Q: Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking…

A: The internal return rate is the minimum required rate of return at which NPV of the project is equal…

Q: Suppose you bought a stock for $ 47.1 per share and you sold it for $ 14.7 after 4 years. The stock…

A: Beginning Value (Purchase Price): $47.1 per shareEnding Value (Selling Price): $14.7 per shareNumber…

Q: A 6-month call option contract on 100 shares of Home Depot common stock with a strike price of…

A: Value of option = (Spot Price - Strike Price) x Number of shares in a contractProfit = Value of…

Q: Homeowners 3 (Special Form) is an all-risks policy that insures the dwelling and other structures…

A: Homeowners 3 (Special Form) is a comprehensive insurance policy designed to protect homeowners from…

Q: onsider a credit card with a balance of $8500 and an APR of 14.5%. If you want to make monthly…

A: The objective of this question is to calculate the total amount paid over 11 years to clear off a…

Q: The returns to a portfolio over the last 5 years are: Year 1 2 3 4 5 Portfolio Returns 6% 9% 3% 12%…

A: The Sharpe Ratio is a measure that helps investors understand the return of an investment compared…

Q: The accounts receivable turnover rate for Tiger Uniform has gone from an average of 141 times to…

A: accounts receivable period= 365/ accounts receivable turnover rate

Q: A lender that makes a loan to an individual whose only income is commission based and who hasn't…

A: This case belongs to financial services where certain norms are to be followed by the banking…

Q: What is the approximate yield over the 4 year window on a 10% coupon bond, $1000 par, which is…

A: Step 1: Calculate the value of the bond after 4 years:The value of the bond is computed using the…

Q: If xestimatexestimate is estimated with a relative error of 0.001251 and an absolute error of…

A: Let's denote the estimated value as xestimate and the true value as x.Given:Relative error =…

Q: Payback Period New Backhoes Waterways should retain Old Backhoes equipment. Profitability Index 3.58…

A: Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts…

Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Hilltop stock has a current market price of $63 a share. The 1-year $60 call is priced at $8.75 while the 1-year $60 put is
priced at $3.42. What is the risk - free rate of return? Group of answer choices 4.04% 3.61 % 4.62% 3.11%

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1: Given data

VIEW

Step 2: Calculation of risk free rate

VIEW

Solution

VIEW

Step by step

Solved in 3 steps with 1 images

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Using the equity asset valuation model (CAPM) equation, determine the required return for the shares of the following companies, if the market return is 7.50% (Rm = 7.50%) and the risk-free asset return is 1.25% (RF = 1.25%). You must show all counts. Stock Beta SKT 0.65 COST 0.90 SU 1.42 AMZN 1.57 V 0.94
The risk-free rate is 4.15 percent. What is the expected risk premium on this stock given the following information? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Probability of Rate of Return if State State of the Economy State of Economy Вoom Occurs 0.35 16% Normal 14% 0.65
Stock A's stock has a beta of 1.30, and its required return is 11.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) Select the correct answer. a. 8.45% b. 8.50% c. 8.60% d. 8.55% e. 8.65%
Review the following market information: Current Stock Market Return 11.25% Current T-Bill Price $979.43 Historic T-Bill Average Return 2.80% Historic Stock Market Average Return 8.10% Stock Beta 0.84 What is the required return (rounded to two places)? Multiple Choice 9.20% 7.25% 10.49% 6.55% None of the above
The risk-free rate is 1.13% and the market risk premium is 6.26%. A stock with a β of 0.84 will have an expected return of ____%. Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))
Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.) a. 8.76% b. 8.98% c. 9.21% d. 9.44% e. 9.68%
The risk-free rate is 3%, the market risk premium (MRP) is 8%, and the Beta of Lotsa Dough common stock is 0.9. What is LotsaDough's cost of common equity using the SML/CAPM approach? Group of answer choices 7.5% 10.2% 13.7% 15.1%
The trader in the above question receives $9.8 from selling the call. Which statement about the stock's volatility is correct? Group of answer choices Volatility is higher than 20% Volatility is less than 20% Volatility is equal to 20%
Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock (b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 a) Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal…
Consider the following simplified APT model: Factor Expected Risk Premium Market 6.4% Interest Rate -0.6% Yield Spread 5.1% Factor Risk Exposures Market Interest Rate Yield Spread Stock Stock(b1) (b2) (b3) P 1.0 -2.0 -0.2 P2 1.2 0 0.3 P3 0.3 0.5 1.0 Required: 1. Calculate the expected return for the above stocks. Assume risk free rate is 5%. Consider a portfolio with equal investments in stocks P, P2 and P3 2.What are the factor risk exposures for the portfolio? 3.What is the portfolio’s expected return?
Which one of the following stocks is correctly priced if the risk-free rate of return is 3.0 percent and the market risk premium is 7.5 percent? Expected Return 8.46% Stock A B с D E 0000С Stock A O Stock D Stock C O Stock E Beta 77 1.46 1.27 1.44 .95 Stock B 12.47 11.19 13.80 8.65
Assume a stock pays a perpetual dividend of 2 dollars, has a required rate of return of 9%, a relative bid ask spread of 0.5% and a relative trading frequency of 0.1 (μ=0.1). According to the Amihud and Mendelson (1986) model, the price of the stock would be: a.$22.10 b. $2.00 c. $9.02 d. Other e. $14.50 Give typing answer with explanation and conclusion