PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 22, Problem 19PS
Summary Introduction
To discuss: The reasons on whether the procedure give appropriate answers.
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Students have asked these similar questions
3. Forecasting stock value
Understanding the returns from investing
When buying stock, you can expect to earn money through future current income (from ) and future capital appreciation (from ). Together, your total earnings from a given investment can be expressed in terms of the approximate yield. This value makes it easier for you to compare investment options.
Understanding the Approximate Yield Equation
The formula for the approximate yield of an investment can look intimidating, but it’s really just a function of three things: (1) average current income, (2) average capital gains, and (3) the average value of the investment. Based on the information in the table, compute each of these values for the two stocks over a 3-year period and enter the values into the bottom half of the table.
Stock 1
Stock 2
Expected average annual dividends (2012–2014)
$0.95
$2.65
Current stock price
$50
$119
Expected future stock price (2014)
$62
$149…
a) Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price ?, a short position in five call options with exercise price 2? and a long position in four call options with exercise price 3?. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)?
b) Draw the profit diagram of the portfolio above (and clearly state any assumptions you make). Recall that the profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?
Which of the following strategy would you adopt if you expect the fall in prices of a stock?
A. Buy a call
B. Sell a call
C. Sell a put
D. Buy a future
Chapter 22 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 22 - Real options Respond to the following comments. a....Ch. 22 - Prob. 2PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 4PSCh. 22 - Real options Describe each of the following...Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Expansion options Look again at Table 22.2. How...Ch. 22 - Prob. 8PSCh. 22 - Timing options Look back at the Malted Herring...Ch. 22 - Prob. 10PS
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- Select the best answer with respect to a stock's "alpha"? (In a CAPM world) Group of answer choices The expected return on an asset relative to the expected return on the market The expected return on an asset relative to the riskiness of the asset The expected return on an asset relative to the risk free rate The expected return on an asset relative to what CAPM predicts for the asset's expected returnarrow_forwardR2 With reference to the Black Scholes model, explain the concept of risk neutral valuation. Outline theMonte Carlo valuation procedures. Use the Monte Carlo method to price an option of your own choice,compare the obtained price with the market price, and discuss your results NOTE:answer to the question plzarrow_forwardb) Carefully draw the payoff diagram of a portfolio consisting of a long position in two call options with exercise price K, a short position in five call options with exercise price 2K and a long position in four call options with exercise price 3K. All options have the same maturity date and the same underlying stock. What reasons could a speculator have for holding such a portfolio (explain in detail)? c) Draw the profit diagram of the portfolio above (and clearly state any assumptions you make). Recall that the profit is equal to the difference between the payoff of the portfolio at expiry (maturity) date and the cost of the portfolio. Is the cost of the portfolio positive?arrow_forward
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