Two investors are evaluating General Electric’s stock for possible purchase.They agree on the expected value of D1and also on the expected futuredividend growth rate. Further, they agree on the risk of the stock. However,one investor normally holds stocks for 2 years and the other normally holdsstocks for 10 years. On the basis of the type of analysis done in this chapter,they should both be willing to pay the same price for General Electric’s stock.True or false? Explain

A.K. Scott’s stock is selling for $37 a share. A 3-month call on this stock with a strike price of $38 is priced at $2. Risk-free assets are currently returning 0.28 percent per month. a) What should be the price of a 3-month put option on this stock with a strike price of $38? b) Which of the two options is currently in the money and does that accord with your conclusions about their relative prices?

Stan is expanding his business and will sell common stock for the needed funds. If the current risk-free rate is 2.9% and the expected market return is 12.5%, what is the cost of equity for Stan if the beta of the stock is a.0.72, b.0.86,

You have written a call option on Walmart common stock. The option has an exercise price of $81, and Walmart’s stock currently trades at $79. The option premium is $1.60 per contract. a. How much of the option premium is due to intrinsic value versus time value? b. What is your net profit if Walmart’s stock price decreases to $77 and stays there until the option expires? c. What is your net profit on the option if Walmart’s stock price increases to $87 at expiration of the option and the option holder exercises the option?

Optival’s stock is currently trading at $60 per share with a historical volatility of 20%. The risk-free rate is 4%. Consider a European call and put option on Optival’s stock with an exercise price of $55 that expires in 2 years. Use excel or a similar program to determine the option price using the Black-Scholes formula.   (a): What is the value the European call and put option on Optival’s stock with a strike price of $60?  (b): To the nearest cent, how much does the option value change for the following adjustments to the input values:  ∆ in Call Value ∆ in Put Value  ↑ stock price by $1 to $61  ↑ strike price by $1 to $56  ↑ the rF by 1% to 5%  ↑ volatility by 1% to 21%  ↑ time to maturity by 1 yr  (c): Why does the value of the call increase by less than $1 when the stock price increases by $1?  (d): To the nearest percent and holding all else constant, how high would the risk-free rate need to be for a 1 year increase in time to maturity to have a negative impact on the value of…

You think that there is an arbitrage opportunity on the market. The current stock price of Wesley corp. is $20 per share. A one- year put option on Wesley corp. with a strike price of $18 sells for $3.33, while the identical call sells for $7. The one-year risk- free interest rate is 8%. Assuming that the put option is fairly priced, compute the fair price of the call option and explain what you must do to exploit this arbitrage opportunity and what will be your gain.

You have $261,000 to invest in a stock portfolio. Your choices are Stock H, with an expected return of 14.1 percent, and Stock L, with an expected return of 11.2 percent. If your goal is to create a portfolio with an expected return of 12.55 percent, how much money will you invest in Stock H and in Stock L? Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Investment in Stock H Investment in Stock L

Your stockbroker, John Smith, calls you with a hot stock tip to buy SMITH Inc. The stock is currently selling for $25 a share. You gather the following data to evaluate Smith's recommendation. The risk free rate is 3%, and you demand a 14% return on the market portfolio. SMITH's current dividend is $2.50 a share. You decide to get other necessary estimates from a third-party, Rocky Enterprises. Rocky has estimated that SMITH's beta is 2.0 and that the stock's dividend will grow at a constant 10 percent rate. Based on your estimates, is Smith's recommendation to buy SMITH a good one? What do you think the stock is worth?

Suppose there is also a 1-year European put option on the same stock as in Question 3 with exercise price $30. The current stock price is also $25 and the stock price, in 1 year, will be either $35 (up by 40%) or $20 (down by 20%). The interest rate is 8%. This stock does not pay dividend. What is the value of the put option? Please use risk neutral probability method and assume discrete discounting.  (2) What is put-call parity in option pricing? What needs to be true in order for put-call parity to hold?

Learn Corp. (Ticker: LC), an education technology company, is considered to be one of the least risky companies in the education sector. Investors trade call options for Learn Corp., whose stock is currently trading at $18.00. Suppose you are interested in buying a call option with a strike price of $25.20 that expires in 6 months. (Assume that you get the option for free!) Based on speculations and probability analysis, you compute and collect the following information for your price analysis of the option: • For LC’s options, time until expiration (t) is taken as 0.50 year (6 months/12 months). • LC’s stock could go up by a factor of 1.50 (u). • LC’s stock could decline by a factor of 0.60 (d).   At this time, LC’s stock price is    , and if you exercised the option, your payoff would be    . Therefore, if the option is out-of-the-money, you    exercise the option.   Calculate the ending stock price of Learn Corp. for both possible outcomes and the payoff in both…