Problem 1: Intel stock is trading at $100 per share. The risk-free interest rate (annualized, continuously compounded) is 4.00%. The market assumes that Intel will not pay any dividend within the next 3 months. (a) What must be the forward price to purchase one share of Intel stock in 3 months? (b) Suppose Intel suddenly announces a dividend of $2 per share in exactly 2 months, and assume that the Intel stock price does not change upon the announcement. What is the new 3-month forward price for Intel? •deliverable does not include dividends paid over the life of the contract. (c) If after the dividend announcement, the 3-month forward price still stays the same, how would you make arbitrage profit from the market mispricing?

The common stock of the P.U.T.T. Corporation has been trading in a narrow price range for the past month, but you are convinced it is going to break far out of that range in the next 6 months. You do not know whether it will go up or down, however. The current price of the stock is $125 per share, and the price of a 6 month call option at an exercise price of $125 is $6.93. Required: If the semiannual risk-free interest rate is 5%, what must be the price of a 6-month put option on P.U.T.T. stock at an exercise price of $125? (The stock pays no dividends.) What would be a simple options strategy to exploit your conviction about the stock price's future movements? How far would it have to move in either direction for you to make a profit on your initial investment?

D. (1) The shares of BrightStark Ltd. are expected to generate the following possible returns in one year. What is the expected return over the next 12 months? Assume that the stock pays no dividends. Return 3% 4% 7% 15% 25% Probability 0.05 0.25 0.30 0.25 0.15 (2) Suppose Brightlight, Inc. was trading at $27.29 per share. At that time, it pays an annual dividend of $0.32 per share, and analysts have set a 1-year target price around $33.30 per share. What is the expected return on this stock? (3) What is the price for a stock with an expected dividend and price next year of $1 and $30, respectively? Use a 10% discount rate. (4) What is the current share price for a firm which has just paid a dividend of £2.5 and expects to increase its dividend by 3.5% every year, and the company has a required rate of return of 5%?

The stock price of Atlantis Corp. is $43 today. The risk-free rate of return is 10%, and Atlantis Corp. pays no dividends. A call option on Atlantis Corp. stock with an exercise price of $40 and an expiration date 6 months from now is worth $5 today. A put option on Atlantis Corp. stock with an exercise price of $40 and an expiration date 6 months from now should be worth __________ today.   A. $.05     B. $.14     C. $2     D. $3.95

Assume Evco, Inc. has a current stock price of $48.64 and will pay a $2.25 dividend in one year; its equity cost of capital is 10%. What price must you expect Evco stock to sell for immediately after the firm pays the dividend in one year to justify its current price? We can expect Evco stock to sell for $. (Round to the nearest cent.)

A stock you are interested in paid a dividend of $1 last year. The anticipated growth rate in What is the price of a $60 strike put? Assume S = $63.75, σ = 0.20, r = 0.055, the stock pays no dividend and the option expires in 50 days? and earnings is 25% for the next 2 years before settling down to a constant 5% growth rate. The discount rate is 12%. Calculate the expected price of

7. Doctors' Inc. just paid an annual dividend of $2.00 last week and is currently selling for $25 per share (not necessarily the value). Its dividends are expected to increase by 5% annually. Based on the riskiness of Doctors' Inc's stock, your required rate of return is 15%. What should be your trading strategy on this stock? a. b. C. d. e. Buy the stock at $25.00 if you don't own it as it is worth $21.00 per share. Sell the stock if you own it at $25.00 as it is worth $21.00 per share. Buy the stock at $25.00 if you don't own it as it is worth $28.00 per share. Sell the stock if you own it at $25.00 as it is worth $13.50 per share. Nothing, the stock is fairly priced at $25.00 per share.

Suppose you can borrow and lend at the annual interest rate of 6% per annum. The IBM stock is trading at $200. It is not going to pay any dividend in one year. Use this information to answer the following three questions. 20. What is the fair forward price of a forward contract which calls for the delivery of 1 share of IBM stock at the end of one year? A. $216 B. $210 C. $214 D. $212 21. If the actual forward price Fa is $214, your arbitrage strategy is to A. buy one share of IBM, borrow $200, and sell the forward B. buy one share of IBM, borrow $212, and buy the forward C. short one share of IBM, lend $200, and buy the forward D. short one share of IBM, borrow $200, and sell the forward 22. At the end of one year, suppose IBM stock price is St, then the cash flow in the spot (stock) market is _, the cash flow in the forward contract is and the arbitrage profit is A. ST, 214- ST, 2 B. -St, ST-214, 2 C. -ST, 214-ST, 2 D. ST, ST-214, 2

The stock of Business Adventures sells for $40 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Boom Normal economy Recession Expected return Standard deviation Dividend $ 2.80 1.80 0.90 Required: a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return Standard deviation Stock Price $ 48 43 34 b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 5%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) % %

ABC common stock is expected to pay a dividend of $3 a share at the end of the year; the required rate of return is 10%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $100 a share. Assuming the market is in equilibrium, the stock's price at the end of year 5 will be $_______. $60.83 $140.26 $54.12 $115.43