Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 25, Problem 25QP
Put Delta [LO2] In the chapter, we noted that the delta for a put option is N(d1) − 1. Is this the same thing as − N(−d1)? (Hint: Yes, but why?)
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State the decision criteria for each of the following. (2)
PI
>
MIRR
>
NPV
>
IRR
>
options;
0
1
PI
MIRR
NPV
IRR
Payback
Consider the following payoff table:
DA: Decision Alternative.
Decision Alternative Good Bad
Probabilities
State of Nature
0.6
DA1
-3.22
DA2
13.80
DA3
3.75
DA4
4.06
6.33
What is the Expected value under perfect Information (EVUPI)?
(Please keep 2 decimals for your answer)
Your Answer:
Answer
0.4
5.21
-5.40
6.00
Direct Energy has two options for upgrading a hydro-electric power station to
meet new government standards.
Option 1: Direct Energy will make the upgrades themselves. This is expected to
cost $11,600 at the end of each month for 15 years. At the end of the operation
(in 15 years) Direct Energy expects to sell all equipment needed for the
upgrade for $102,000.
Option 2: Pay experienced contractors. This will cost $25,000 up front and
$11,700 monthly (at the end of every month) for 13 years.
Assume all interest is 3.19% compounded monthly.
Round the answers to NPV (Option 1), and NPV (Option 2) to the nearest
dollar. Round all other answers to two decimal places where applicable.
1) Find the net present value of option 1:
P/Y =
C/Y =
N =
I/Y =
PV =
PMT=
FV =
NPV (Option 1) = $
P/Y
C/Y
N
I/Y
PV
Payments (Cost)
2) Find the net present value of option 2:
Payments (Cost)
PMT
$
FV
$
(If the NPV is negative, enter it as a negative number. If the NPV is zero,
enter 0.)
$
$
%
$
$
Sale of…
Chapter 25 Solutions
Fundamentals of Corporate Finance
Ch. 25.1 - Prob. 25.1ACQCh. 25.1 - Prob. 25.1BCQCh. 25.2 - Prob. 25.2ACQCh. 25.2 - Prob. 25.2BCQCh. 25.3 - Prob. 25.3ACQCh. 25.3 - Prob. 25.3BCQCh. 25.4 - Why do we say that the equity in a leveraged firm...Ch. 25.4 - Prob. 25.4BCQCh. 25.5 - Prob. 25.5ACQCh. 25.5 - Prob. 25.5BCQ
Ch. 25 - Prob. 25.1CTFCh. 25 - Prob. 25.3CTFCh. 25 - Prob. 1CRCTCh. 25 - Prob. 2CRCTCh. 25 - Prob. 3CRCTCh. 25 - Prob. 4CRCTCh. 25 - Prob. 5CRCTCh. 25 - Prob. 6CRCTCh. 25 - Prob. 7CRCTCh. 25 - Prob. 8CRCTCh. 25 - Prob. 9CRCTCh. 25 - Prob. 10CRCTCh. 25 - Prob. 1QPCh. 25 - Prob. 2QPCh. 25 - PutCall Parity [LO1] A stock is currently selling...Ch. 25 - PutCall Parity [LO1] A put option that expires in...Ch. 25 - PutCall Parity [LO1] A put option and a call...Ch. 25 - PutCall Parity [LO1] A put option and call option...Ch. 25 - BlackScholes [LO2] What are the prices of a call...Ch. 25 - Delta [LO2] What are the deltas of a call option...Ch. 25 - BlackScholes and Asset Value [LO4] You own a lot...Ch. 25 - BlackScholes and Asset Value [L04] In the previous...Ch. 25 - Time Value of Options [LO2] You are given the...Ch. 25 - PutCall Parity [LO1] A call option with an...Ch. 25 - BlackScholes [LO2] A call option matures in six...Ch. 25 - BlackScholes [LO2] A call option has an exercise...Ch. 25 - BlackScholes [LO2] A stock is currently priced at...Ch. 25 - Prob. 16QPCh. 25 - Equity as an Option and NPV [LO4] Suppose the firm...Ch. 25 - Equity as an Option [LO4] Frostbite Thermalwear...Ch. 25 - Prob. 19QPCh. 25 - Prob. 20QPCh. 25 - Prob. 21QPCh. 25 - Prob. 22QPCh. 25 - BlackScholes and Dividends [LO2] In addition to...Ch. 25 - PutCall Parity and Dividends [LO1] The putcall...Ch. 25 - Put Delta [LO2] In the chapter, we noted that the...Ch. 25 - BlackScholes Put Pricing Model [LO2] Use the...Ch. 25 - BlackScholes [LO2] A stock is currently priced at...Ch. 25 - Delta [LO2] You purchase one call and sell one put...Ch. 25 - Prob. 1MCh. 25 - Prob. 2MCh. 25 - Prob. 3MCh. 25 - Prob. 4MCh. 25 - Prob. 5MCh. 25 - Prob. 6M
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- The formula Co >= 0 if (So - E) correctly describes the boundary values for an American call option. True or False True Falsearrow_forwardThink about whether a risk-free asset should earn a risk-premium beyond the risk-free rate. Thinking about that should give you an idea of the beta for a risk-free asset. Or, look again at the CAPM equation: E(Ri)=Rf+βi[E(RM)−Rf] Given this equation, what beta sets the E(R) of the risk free asset equal to the risk-free rate? A) zero B) 0.5 C) 1.0 D) its randomarrow_forward3. Show that the Black-Scholes formula for a call option gives a price which tends to [ST − K]+ as t → T .arrow_forward
- 1. The option is currently A. In-the-moneyB. At-the-moneyC. Out-the-money2. Determine the In/At/Out- the money by _____ 3. Determine the Intrinsic Valuearrow_forwardThe future value interest factor is calculated as: Select one: O a. None of the other options are correct O b. (1 + r)(t)arrow_forwardConsider the formula: A = P(1 + r)t. What can we say about the variable A? it is a future value it is a present valuearrow_forward
- Assuming your utility function U = E(r) - Ao². Consider the investments shown in the table. If your risk aversion coefficient is -2, which investment would you choose? Investment E[r] #1 #2 #3 #4 #2 #3 #4 #1 12% 15% 15% 24% σ 40% 40% 30% 40%arrow_forward12 Using Put-Call Parity, prove that the delta of a Put is equal to the delta of a Call minus 1. What value for the delta of a put are expected if it is very much in the money?arrow_forwardCan you have an investment with DCFRR > MARR, but NPV $0 (calculating NPV with iTyM=MARR)? Can you have an investment with DCFRR < MARR, and NPV < $0 (calculating NPV with iTyM=MARR)?arrow_forward
- 1. The option is currently A. In-the-moneyB. At-the-moneyC. Out-the-money 2. Determine the In/At/Out- the money by ____ 3, Determine the Intrinsic Valuearrow_forwardHydro Ottawa has two options for upgrading a natural gas power station to meet new government standards. Option 1: Hydro Ottawa will make the upgrades themselves. This is expected to cost $12,700 at the end of each month for 12 years. At the end of the operation (in 12 years) Hydro Ottawa expects to sell all equipment needed for the upgrade for $122,000. Option 2: Pay experienced contractors. This will cost $28,000 up front and $13,900 monthly (at the end of every month) for 15 years. Assume all interest is 3.72% compounded monthly. Round the answers to NPV (Option 1), and NPV (Option 2) to the nearest dollar. Round all other answers to two decimal places where applicable. 1) Find the net present value of option 1: P/Y = C/Y = N = I/Y = PV = PMT= FV = Payments (Cost) GA % Sale of equipment (Residual) GA GA LA %arrow_forwardBelow you are given a payoff table involving three states of nature and two decision alternatives. 4 29 42.5 12 Decision d1 d2 38.5 States of Nature $2 s1 The probability that s1 will occur is 0.1; the probability that s2 will occur is 0.6. 4 What is the expected value of the best decision? 80 40 45 50 s3 -20 15arrow_forward
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