1. (15 points) NORREL Corporation’s
stock is selling for $35 per share. An
investor is considering buying a call option with an exercise price of
$40. The investor is willing to pay the
premium of 50 cents per option.
a.
Calculate the exercise value of the option?
b.
Why is an investor willing to pay 50 cents an option when the stock is
going for $35?
| c. Calculate the exercise value if the price of the stock increases to $42 per share. d. e. If the exercise Your company is evaluating new equipment that will cost $1,000,000. The equipment is in the MACRS 3-year class and will be sold after 3 years for $100,000. Use of the equipment will increase net working capital by 100,000. The equipment will save $450,000 per year in operating costs. The company’s tax rate is 30 percent and its cost of capital is 10%.
|
4. (10 points) The exchange rate between
the Japanese yen and the U.S. dollar is 94.72
yen = 1U.S$. A U.S. company
agrees to purchase goods for 40 million yen, with payment due in 6 months. Payment will be made in yen.
a. How many U.S. dollars would the company need
to purchase the goods and pay for them today?
b. Has the yen appreciated or depreciated
against the dollar if the exchange rate is 95.61 yen to 1$US in 6 months? Why?
for the goods if the exchange rate is 95.61yen to 1$US?
d. Does the Japanese exporter or the U.S.
importer bear the exchange rate risk ?
Why?
e. Describe3 ways in which the U.S. company can reduce exchange rate risk.
Question 5. (15 points) Taylor Corporation wants to raise $40 million. Its stock price is now $25 per share. The new issue will be priced at $23 per share. The company will incur expenses of $1 million. The underwriters’ compensation will be 8% of the issue price and the underwriter will incur expenses of $1.2 million.
a. How many shares of stock must be sold for the company to net $40 million after costs and expenses?
b. Calculate theprofit or loss for the investment banker?
c. Explain the terms “best efforts basis” and “underwriting” as they are used in investment banking. .
d. What is the most important single reason for a firm to go public.
e. What is the most important single reason for a firm NOT to go public.
6. (15 points) Andiola Corporation is
evaluating whether to lease or purchase equipment. Its tax rate is 30 percent. The purchase price is $1.2 million, required
modications to the equipment will cost $50,000.
The company would depreciate the equipment over 4 years, using
straight-line depreciation. A 4-year
lease calls for a payment of $350,000 at the beginning of each year. If the equipment is purchased, the company
will borrow from its bank at an interest
rate of 10 percent.
a. Calculate the cost of purchasing the
equipment.
| b. Calculate the cost of leasing the equipment. c. Calculate the net advantage to leasing. Should the company purchase or lease the (15 points) How might Wal-Mart (or another company) take advantageof each of the following: Do not merely provide a definition. Provide a specific example of each a. b. c. d. e. Decision-tree analysis |
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