This document contains solutions to problems from Chapter 16 on hybrid and derivative securities. The problems cover various topics such as lease cash flows, loan interest calculations, loan amortization schedules, comparing leases to purchases, determining values of convertible bonds and attached warrants, and calculating theoretical warrant values. The solutions provide numerical calculations and explanations for each problem.
The document contains solutions to practice problems related to mergers and acquisitions. Problem 17-1 discusses the tax effects of an acquisition, finding that the tax savings are less than the cost of the merger. Problem 17-2 also examines tax effects, determining that a proposed merger is recommended based on positive net benefit. Problem 17-3 evaluates the present value of tax benefits for two potential acquisition targets.
The document discusses the cost of capital and leverage for firms, including the weighted average cost of capital (WACC), beta and cost of equity calculations for levered firms using the Hamada equation, and how to determine the cost of capital for new projects, divisions, or companies based on their specific risk levels. Examples are provided to illustrate how to calculate WACC, levered beta, and cost of equity for firms and divisions with different capital structures and risk profiles.
This document contains solutions to problems related to leverage and capital structure.
1) It provides calculations of breakeven points, degrees of operating leverage, earnings per share, and degrees of financial leverage for various companies.
2) It demonstrates how changes in sales, costs, prices, and financial structure impact measures of leverage and risk.
3) Integrative problems bring together multiple leverage concepts to analyze overall business risk for different firms.
CA NOTES ON RISK, RETURN AND PORTFOLIO PRACTICALS OF STRATEGIC FINANCIAL MODE...Kanoon Ke Rakhwale India
CA NOTES ON RISK, RETURN AND PORTFOLIO PRACTICALS OF STRATEGIC FINANCIAL MODELING
FREE AFFIDAVITS AND NOTICES FORMATS
FREE AGREEMENTS AND CONTRACTS FORMATS
FREE LLB LAW NOTES
FREE CA ICWA NOTES
FREE LLB LAW FIRST SEM NOTES
FREE LLB LAW SECOND SEM NOTES
FREE LLB LAW THIRD SEM NOTES
FREE LLB LAW FOURTH SEM NOTES
FREE LLB LAW FIFTH SEM NOTES
FREE LLB LAW SIXTH SEM NOTES
FREE CA ICWA FOUNDATION NOTES
FREE CA ICWA INTERMEDIATE NOTES
FREE CA ICWA FINAL NOTES
KANOON KE RAKHWALE INDIA
HIRE LAWYER ONLINE
LAW FIRMS IN DELHI
CA FIRM DELHI
VISIT : https://www.kanoonkerakhwale.com/
VISIT : https://hirelawyeronline.com/
This document contains solutions to problems related to chapter 13 on dividend policy. Problem P13-1 discusses procedures for declaring a cash dividend, including journal entries to record the declaration and payment. Problem P13-2 discusses ex-dividend dates and whether an investor would be better off buying stock before or after the ex-dividend date. Problem P13-3 discusses residual dividend policy, where a firm pays dividends from funds left over after meeting investment requirements.
The document discusses key bond terminology including face value, coupon, coupon rate, bond price, bond yield, and current yield. It provides examples of how to calculate the price of a bond given its coupon rate, face value, maturity date, and required yield. It also discusses how bond prices are affected by changes in interest rates, bond yields, credit risk, and bond ratings.
1. The document provides examples of time value of money problems involving present value, future value, interest rates, and number of periods calculations. It gives the calculations for various cash flows received or paid in different periods with different interest rates.
2. It includes problems calculating NPV for projects such as factories, machines, and ships where the cash flows include costs, revenues, operating costs, refit costs, and salvage value over multiple periods.
3. The last examples calculate the amount of annual savings needed to buy a boat in 5 years and the annual annuity payment an individual can expect based on investing a present value over their life expectancy.
cost of capital .....ch ...of financial management ..solution by MIAN MOHSIN ...mianmohsinmumtazshb
The document provides solutions to problems from Chapter 11 on the cost of capital.
It calculates the cost of various sources of capital such as debt, preferred stock, and common equity. It also calculates the weighted average cost of capital (WACC) using different capital structure weights.
Key calculations include:
1) Calculating the cost of debt using the yield to maturity method and the approximation method.
2) Calculating the cost of preferred stock as the dividend yield.
3) Calculating the cost of common equity using the capital asset pricing model.
4) Calculating the WACC using both book value and market value weights for the capital structure.
5) Exploring how
The document contains solutions to practice problems related to mergers and acquisitions. Problem 17-1 discusses the tax effects of an acquisition, finding that the tax savings are less than the cost of the merger. Problem 17-2 also examines tax effects, determining that a proposed merger is recommended based on positive net benefit. Problem 17-3 evaluates the present value of tax benefits for two potential acquisition targets.
The document discusses the cost of capital and leverage for firms, including the weighted average cost of capital (WACC), beta and cost of equity calculations for levered firms using the Hamada equation, and how to determine the cost of capital for new projects, divisions, or companies based on their specific risk levels. Examples are provided to illustrate how to calculate WACC, levered beta, and cost of equity for firms and divisions with different capital structures and risk profiles.
This document contains solutions to problems related to leverage and capital structure.
1) It provides calculations of breakeven points, degrees of operating leverage, earnings per share, and degrees of financial leverage for various companies.
2) It demonstrates how changes in sales, costs, prices, and financial structure impact measures of leverage and risk.
3) Integrative problems bring together multiple leverage concepts to analyze overall business risk for different firms.
CA NOTES ON RISK, RETURN AND PORTFOLIO PRACTICALS OF STRATEGIC FINANCIAL MODE...Kanoon Ke Rakhwale India
CA NOTES ON RISK, RETURN AND PORTFOLIO PRACTICALS OF STRATEGIC FINANCIAL MODELING
FREE AFFIDAVITS AND NOTICES FORMATS
FREE AGREEMENTS AND CONTRACTS FORMATS
FREE LLB LAW NOTES
FREE CA ICWA NOTES
FREE LLB LAW FIRST SEM NOTES
FREE LLB LAW SECOND SEM NOTES
FREE LLB LAW THIRD SEM NOTES
FREE LLB LAW FOURTH SEM NOTES
FREE LLB LAW FIFTH SEM NOTES
FREE LLB LAW SIXTH SEM NOTES
FREE CA ICWA FOUNDATION NOTES
FREE CA ICWA INTERMEDIATE NOTES
FREE CA ICWA FINAL NOTES
KANOON KE RAKHWALE INDIA
HIRE LAWYER ONLINE
LAW FIRMS IN DELHI
CA FIRM DELHI
VISIT : https://www.kanoonkerakhwale.com/
VISIT : https://hirelawyeronline.com/
This document contains solutions to problems related to chapter 13 on dividend policy. Problem P13-1 discusses procedures for declaring a cash dividend, including journal entries to record the declaration and payment. Problem P13-2 discusses ex-dividend dates and whether an investor would be better off buying stock before or after the ex-dividend date. Problem P13-3 discusses residual dividend policy, where a firm pays dividends from funds left over after meeting investment requirements.
The document discusses key bond terminology including face value, coupon, coupon rate, bond price, bond yield, and current yield. It provides examples of how to calculate the price of a bond given its coupon rate, face value, maturity date, and required yield. It also discusses how bond prices are affected by changes in interest rates, bond yields, credit risk, and bond ratings.
1. The document provides examples of time value of money problems involving present value, future value, interest rates, and number of periods calculations. It gives the calculations for various cash flows received or paid in different periods with different interest rates.
2. It includes problems calculating NPV for projects such as factories, machines, and ships where the cash flows include costs, revenues, operating costs, refit costs, and salvage value over multiple periods.
3. The last examples calculate the amount of annual savings needed to buy a boat in 5 years and the annual annuity payment an individual can expect based on investing a present value over their life expectancy.
cost of capital .....ch ...of financial management ..solution by MIAN MOHSIN ...mianmohsinmumtazshb
The document provides solutions to problems from Chapter 11 on the cost of capital.
It calculates the cost of various sources of capital such as debt, preferred stock, and common equity. It also calculates the weighted average cost of capital (WACC) using different capital structure weights.
Key calculations include:
1) Calculating the cost of debt using the yield to maturity method and the approximation method.
2) Calculating the cost of preferred stock as the dividend yield.
3) Calculating the cost of common equity using the capital asset pricing model.
4) Calculating the WACC using both book value and market value weights for the capital structure.
5) Exploring how
This document discusses the concept of cost of capital and how to measure it. It defines cost of capital as the minimum rate of return a company must earn on invested funds to prevent a decrease in shareholder value. The document then discusses how to calculate the cost of various components of capital structure including:
- Preference share capital
- Debt capital
- Equity share capital
- Retained earnings
It provides formulas and examples for calculating the cost of each component based on factors like dividend/interest rates, issue price, tax rates, redemption value, and growth rates. The weighted average cost of capital is also introduced as a way to incorporate different costs of all components of a firm's capital structure.
1) The document provides solutions to problems related to interest rates and bond valuation. It includes calculations of real rates of return, nominal interest rates, yield curves, and bond valuations.
2) Bond valuations are calculated using the present value of interest payments and maturity value. Changes in required returns impact bond values, with higher required returns lowering prices.
3) Yield curves from the past show how expectations of future interest rates have changed over time, from stable to downward sloping to upward sloping. Risk premiums incorporate default, interest rate, liquidity, and other risks.
This document contains solutions to sample exam questions for an MFE/3F exam. The first question involves using put-call parity to calculate the risk-free interest rate given call and put option prices on a stock. The solution is 0.039. The second question involves analyzing if given call and put option prices allow for arbitrage opportunities; both Mary and Peter's proposed portfolios are correct. The third question calculates the fee amount y% an insurance company should charge on a stock-linked deferred annuity to break even. The solution is 13.202%. The fourth question values an American call option on a stock using a two-period binomial model; the value is 2. The fifth question values a dollar-denomin
This document provides practice questions and answers related to valuing bonds. Specifically:
- It gives the calculations for determining the present value of various bonds with different coupon rates, payment frequencies, yields, and maturity dates.
- Tables show the effect of changing interest rates on the price of a bond over time.
- Questions ask the reader to calculate bond prices based on yields, determine if the expectations hypothesis holds based on changing forward rates, and compare the attractiveness of bonds with different coupons but the same yields.
- Duration and convexity are calculated for bonds to determine which has the highest risk given a rising yield curve. The relationship between bond prices and yields is examined.
In summary,
This document contains solutions to problems from Chapter 7 on stock valuation. Problem P7-1 discusses authorized and available shares. Problem P7-2 covers preferred dividends for noncumulative and cumulative preferred stock. Problem P7-3 tests understanding of preferred dividends in arrears. Problem P7-4 involves valuation of convertible preferred stock.
The document discusses various topics related to bond valuation and interest rates, including:
- Characteristics of bonds such as fixed coupon payments and paying par value at maturity.
- How the intrinsic value of a bond is calculated by discounting its expected cash flows at the required rate of return.
- Examples of how the intrinsic value changes when interest rates change.
- The concept of yield to maturity and examples of calculating YTM for different types of bonds.
The document discusses time value of money concepts like present value, future value, interest rates, and time horizons. It provides examples of using formulas to solve for unknown variables in situations involving deposits, investments, and cash flows. The key formulas discussed are present value (PV), future value (FV), effective annual rate (EAR), and the Rule of 72 for approximations. Adjustments to the formulas for cases of interest compounded more frequently than annually are also covered.
The documents provide financial information for a company, including a trial balance, trading and profit & loss account, and balance sheet.
The trial balance lists the company's income, expenses, assets and liabilities to ensure debits equal credits. The trading account shows how gross profit is generated. The profit & loss account lists expenses to determine if there was a net profit. The balance sheet reports the company's assets, liabilities, and capital at a point in time to ensure assets equal the sum of liabilities and capital.
1. Canadian demand for gasoline may be less price sensitive than US demand, as Canadians have fewer mass transit options in rural areas compared to more urban areas in the US.
2. Calculations are shown for price and income elasticities using percentage changes in quantity, price, and income. The price elasticity of demand is found to be -2.2.
3. Cross-price elasticity is calculated between two goods, showing them to be close substitutes. Estimates for quantity demanded given price and income changes are provided.
Company 1: In 2013, Coolgardie's return on assets decreased to 15.42% from 23.78% in 2012 due to a drop in profit and increased assets. The net profit margin also decreased from 19.83% to 13.92% as expenses increased more than revenue.
Company 2: In 2010, Billie's Bakery had higher liquidity and profitability ratios compared to 2009. The debt to equity ratio was lower in 2010 at 0.39 compared to 0.41 in 2009.
NSW Ltd and QLD Ltd: In the current year, NSW Ltd had higher returns and shorter days for inventory and debtors compared to QLD Ltd, while their current and liquid
This document discusses various equity valuation approaches and methods. It begins by outlining the valuation process of understanding the business, forecasting performance, and selecting an appropriate valuation model. It then describes absolute valuation methods like discounted cash flow analysis using free cash flow to the firm (FCFF) or free cash flow to equity (FCFE). Relative valuation methods discussed include comparing price/earnings (P/E), price/book value (P/B), and enterprise value/EBITDA multiples to industry peers. The document also briefly discusses the residual income model and notes factors to consider in choosing the most appropriate valuation model.
Team maverick bond portfolio managment projekt 1Predrag Pesic
The document outlines steps to match a bond portfolio's cash flows to a set of liabilities through cash matching and duration matching. It first calculates adjusted bond prices with accrued interest, then derives a term structure using zero-coupon bonds and a polynomial curve fit. Cash matching aims to minimize portfolio cost by ensuring cash flows meet or exceed liabilities at each date, holding excess cash at zero rate. Duration matching seeks to match the portfolio and liabilities' sensitivity to interest rates by minimizing the number of bonds while satisfying cash flow and duration constraints.
The document discusses various financial ratios used to analyze the financial performance of Tata Steel Limited for the years 2004 and 2003. It provides the formulas and calculations for current ratio, quick ratio, stock to working capital ratio, and other key ratios. The ratios analyzed include profitability, liquidity, leverage, efficiency, and return measures.
The Cost of Capital/abshor.marantika/Aulia Riskafina-Jeremy Haposan-Rizki Bhi...Aulia Riskafina Kusuma
This document contains sample questions and answers about capital structure and costs of capital. It discusses topics like defining capital structure weights, calculating costs of debt, equity, and preferred stock, accounting for floatation costs and taxes, and computing a weighted average cost of capital. The questions provide examples and formulas to demonstrate how to analyze capital structures and calculate WACC for companies based on their financing sources and costs.
x = 522.08, s2x = 5,333.33
y = 537.08, s2y = 6,615.17
t = (522.08 - 537.08) / √((5,333.33/12) + (6,615.17/12)) = -0.82
Conclusion: There is insufficient evidence to reject the null hypothesis at the 5% significance level.
There is no difference in the car rentals paid in country X and country Y.
(c) The sampling distribution of the mean is the theoretical distribution of sample means that would be
obtained by taking all possible samples of a given size from a population. It is
Project X has an NPV of $2,681 and an ANPV of $920.04. Project Y has an NPV of $1,778 and an ANPV of $1,079.54. Project Z has the highest NPV of $3,585 and ranks first when the ANPV approach is used to account for the unequal project lives. The ANPV approach results in Project Z being ranked first instead of Project X.
This document contains practice problems related to risk and return. It discusses different types of risk like sales risk, operating risk, interest rate risk, and how they can vary between firms or bonds. It also covers risk measurement by calculating expected values and standard deviations for probability distributions. Other topics include the capital asset pricing model, portfolio risk and return, diversification, and how correlation between investments affects portfolio risk.
This slide set is a work in progress and is embedded in my Principles of Finance course that I teach to computer scientists and engineers.
http://awesome.weebly.com/
The document discusses the fundamental time value of money concepts in finance. It defines future value as the value a sum grows to with interest over time, and present value as the amount needed today to be worth a future sum. The four basic concepts are future and present value of a sum, and future and present value of an annuity. Formulas are provided to calculate these values using interest rate and time period. Examples are worked through to demonstrate calculating future and present value of sums and annuities.
The document contains solutions to problems related to calculating the cost of capital, including the cost of debt using both the net present value and yield-to-maturity methods, the cost of preferred stock, the weighted average cost of capital using both book and market weights, and the effect of tax rates on the WACC. It also covers the capital asset pricing model for calculating the cost of common equity. The problems provide examples of calculating costs of different sources of capital and determining the WACC for companies based on their capital structure.
This document contains solutions to practice problems about current liabilities management. It addresses topics like cash discounts, credit terms, accounts receivable financing, inventory financing, and the costs associated with different sources of short-term financing like bank loans, commercial paper, and factoring. The problems calculate effective interest rates and costs of various short-term financing options to determine the most cost effective alternative for different scenarios. Ethics considerations around accounts receivable financing are also discussed.
This document discusses the concept of cost of capital and how to measure it. It defines cost of capital as the minimum rate of return a company must earn on invested funds to prevent a decrease in shareholder value. The document then discusses how to calculate the cost of various components of capital structure including:
- Preference share capital
- Debt capital
- Equity share capital
- Retained earnings
It provides formulas and examples for calculating the cost of each component based on factors like dividend/interest rates, issue price, tax rates, redemption value, and growth rates. The weighted average cost of capital is also introduced as a way to incorporate different costs of all components of a firm's capital structure.
1) The document provides solutions to problems related to interest rates and bond valuation. It includes calculations of real rates of return, nominal interest rates, yield curves, and bond valuations.
2) Bond valuations are calculated using the present value of interest payments and maturity value. Changes in required returns impact bond values, with higher required returns lowering prices.
3) Yield curves from the past show how expectations of future interest rates have changed over time, from stable to downward sloping to upward sloping. Risk premiums incorporate default, interest rate, liquidity, and other risks.
This document contains solutions to sample exam questions for an MFE/3F exam. The first question involves using put-call parity to calculate the risk-free interest rate given call and put option prices on a stock. The solution is 0.039. The second question involves analyzing if given call and put option prices allow for arbitrage opportunities; both Mary and Peter's proposed portfolios are correct. The third question calculates the fee amount y% an insurance company should charge on a stock-linked deferred annuity to break even. The solution is 13.202%. The fourth question values an American call option on a stock using a two-period binomial model; the value is 2. The fifth question values a dollar-denomin
This document provides practice questions and answers related to valuing bonds. Specifically:
- It gives the calculations for determining the present value of various bonds with different coupon rates, payment frequencies, yields, and maturity dates.
- Tables show the effect of changing interest rates on the price of a bond over time.
- Questions ask the reader to calculate bond prices based on yields, determine if the expectations hypothesis holds based on changing forward rates, and compare the attractiveness of bonds with different coupons but the same yields.
- Duration and convexity are calculated for bonds to determine which has the highest risk given a rising yield curve. The relationship between bond prices and yields is examined.
In summary,
This document contains solutions to problems from Chapter 7 on stock valuation. Problem P7-1 discusses authorized and available shares. Problem P7-2 covers preferred dividends for noncumulative and cumulative preferred stock. Problem P7-3 tests understanding of preferred dividends in arrears. Problem P7-4 involves valuation of convertible preferred stock.
The document discusses various topics related to bond valuation and interest rates, including:
- Characteristics of bonds such as fixed coupon payments and paying par value at maturity.
- How the intrinsic value of a bond is calculated by discounting its expected cash flows at the required rate of return.
- Examples of how the intrinsic value changes when interest rates change.
- The concept of yield to maturity and examples of calculating YTM for different types of bonds.
The document discusses time value of money concepts like present value, future value, interest rates, and time horizons. It provides examples of using formulas to solve for unknown variables in situations involving deposits, investments, and cash flows. The key formulas discussed are present value (PV), future value (FV), effective annual rate (EAR), and the Rule of 72 for approximations. Adjustments to the formulas for cases of interest compounded more frequently than annually are also covered.
The documents provide financial information for a company, including a trial balance, trading and profit & loss account, and balance sheet.
The trial balance lists the company's income, expenses, assets and liabilities to ensure debits equal credits. The trading account shows how gross profit is generated. The profit & loss account lists expenses to determine if there was a net profit. The balance sheet reports the company's assets, liabilities, and capital at a point in time to ensure assets equal the sum of liabilities and capital.
1. Canadian demand for gasoline may be less price sensitive than US demand, as Canadians have fewer mass transit options in rural areas compared to more urban areas in the US.
2. Calculations are shown for price and income elasticities using percentage changes in quantity, price, and income. The price elasticity of demand is found to be -2.2.
3. Cross-price elasticity is calculated between two goods, showing them to be close substitutes. Estimates for quantity demanded given price and income changes are provided.
Company 1: In 2013, Coolgardie's return on assets decreased to 15.42% from 23.78% in 2012 due to a drop in profit and increased assets. The net profit margin also decreased from 19.83% to 13.92% as expenses increased more than revenue.
Company 2: In 2010, Billie's Bakery had higher liquidity and profitability ratios compared to 2009. The debt to equity ratio was lower in 2010 at 0.39 compared to 0.41 in 2009.
NSW Ltd and QLD Ltd: In the current year, NSW Ltd had higher returns and shorter days for inventory and debtors compared to QLD Ltd, while their current and liquid
This document discusses various equity valuation approaches and methods. It begins by outlining the valuation process of understanding the business, forecasting performance, and selecting an appropriate valuation model. It then describes absolute valuation methods like discounted cash flow analysis using free cash flow to the firm (FCFF) or free cash flow to equity (FCFE). Relative valuation methods discussed include comparing price/earnings (P/E), price/book value (P/B), and enterprise value/EBITDA multiples to industry peers. The document also briefly discusses the residual income model and notes factors to consider in choosing the most appropriate valuation model.
Team maverick bond portfolio managment projekt 1Predrag Pesic
The document outlines steps to match a bond portfolio's cash flows to a set of liabilities through cash matching and duration matching. It first calculates adjusted bond prices with accrued interest, then derives a term structure using zero-coupon bonds and a polynomial curve fit. Cash matching aims to minimize portfolio cost by ensuring cash flows meet or exceed liabilities at each date, holding excess cash at zero rate. Duration matching seeks to match the portfolio and liabilities' sensitivity to interest rates by minimizing the number of bonds while satisfying cash flow and duration constraints.
The document discusses various financial ratios used to analyze the financial performance of Tata Steel Limited for the years 2004 and 2003. It provides the formulas and calculations for current ratio, quick ratio, stock to working capital ratio, and other key ratios. The ratios analyzed include profitability, liquidity, leverage, efficiency, and return measures.
The Cost of Capital/abshor.marantika/Aulia Riskafina-Jeremy Haposan-Rizki Bhi...Aulia Riskafina Kusuma
This document contains sample questions and answers about capital structure and costs of capital. It discusses topics like defining capital structure weights, calculating costs of debt, equity, and preferred stock, accounting for floatation costs and taxes, and computing a weighted average cost of capital. The questions provide examples and formulas to demonstrate how to analyze capital structures and calculate WACC for companies based on their financing sources and costs.
x = 522.08, s2x = 5,333.33
y = 537.08, s2y = 6,615.17
t = (522.08 - 537.08) / √((5,333.33/12) + (6,615.17/12)) = -0.82
Conclusion: There is insufficient evidence to reject the null hypothesis at the 5% significance level.
There is no difference in the car rentals paid in country X and country Y.
(c) The sampling distribution of the mean is the theoretical distribution of sample means that would be
obtained by taking all possible samples of a given size from a population. It is
Project X has an NPV of $2,681 and an ANPV of $920.04. Project Y has an NPV of $1,778 and an ANPV of $1,079.54. Project Z has the highest NPV of $3,585 and ranks first when the ANPV approach is used to account for the unequal project lives. The ANPV approach results in Project Z being ranked first instead of Project X.
This document contains practice problems related to risk and return. It discusses different types of risk like sales risk, operating risk, interest rate risk, and how they can vary between firms or bonds. It also covers risk measurement by calculating expected values and standard deviations for probability distributions. Other topics include the capital asset pricing model, portfolio risk and return, diversification, and how correlation between investments affects portfolio risk.
This slide set is a work in progress and is embedded in my Principles of Finance course that I teach to computer scientists and engineers.
http://awesome.weebly.com/
The document discusses the fundamental time value of money concepts in finance. It defines future value as the value a sum grows to with interest over time, and present value as the amount needed today to be worth a future sum. The four basic concepts are future and present value of a sum, and future and present value of an annuity. Formulas are provided to calculate these values using interest rate and time period. Examples are worked through to demonstrate calculating future and present value of sums and annuities.
The document contains solutions to problems related to calculating the cost of capital, including the cost of debt using both the net present value and yield-to-maturity methods, the cost of preferred stock, the weighted average cost of capital using both book and market weights, and the effect of tax rates on the WACC. It also covers the capital asset pricing model for calculating the cost of common equity. The problems provide examples of calculating costs of different sources of capital and determining the WACC for companies based on their capital structure.
This document contains solutions to practice problems about current liabilities management. It addresses topics like cash discounts, credit terms, accounts receivable financing, inventory financing, and the costs associated with different sources of short-term financing like bank loans, commercial paper, and factoring. The problems calculate effective interest rates and costs of various short-term financing options to determine the most cost effective alternative for different scenarios. Ethics considerations around accounts receivable financing are also discussed.
This document contains solutions to problems related to leverage and capital structure.
Some key points summarized:
1) Breakeven analysis is performed for multiple companies using algebraic formulas to calculate the quantity needed to break even. Comparisons are made between companies' operating leverage.
2) Graphs are used to show the relationship between sales, costs, profits and losses at different production levels as well as to illustrate how degree of operating leverage decreases as production increases past the breakeven point.
3) Calculations are shown for earnings per share under different financing plans and levels of earnings before interest and taxes to demonstrate how degree of financial leverage is affected.
4) Integrated examples bring together concepts of operating
working capital ch solution financial management ....mohsin mumtazmianmohsinmumtazshb
The document discusses solutions to problems related to working capital and current asset management. It addresses topics such as cash conversion cycle, economic order quantity, accounts receivable management, and cash management techniques. The problems calculate financial metrics and evaluate strategies for reducing costs and improving profitability within the constraints of various assumptions provided in the questions.
This document contains solutions to problems from Chapter 7 on stock valuation. Problem P7-1 discusses calculating the maximum shares available for sale and additional shares needed to raise funds. Problem P7-2 discusses calculating preferred dividends that are cumulative versus non-cumulative. The remaining problems calculate stock prices and values using various models including zero growth, constant growth, and variable growth models.
This document contains solutions to problems from Chapter 7 on stock valuation. Problem P7-1 discusses calculating the maximum shares available for sale and additional shares needed to raise funds. Problem P7-2 discusses calculating preferred dividends that are cumulative versus non-cumulative. The remaining problems calculate stock prices and values using various models including zero growth, constant growth, and variable growth models.
The document contains calculations related to loans, mortgages, and investments. It compares the monthly payments and interest rates of two car loans over 5 years. It also calculates the monthly payment and remaining balance of a $200,000 mortgage loan over 25 years. Finally, it provides the present and future values of cash flows with various rates of return over different time periods.
The document discusses various capital budgeting methods including average return on investment, payback period, net present value, internal rate of return, modified internal rate of return, and profitability index. It provides examples of how to calculate each method and compares the advantages and disadvantages. It also discusses how to estimate cash flows, evaluate capital projects, and conduct sensitivity analysis.
This document provides examples and solutions for calculating various costs of capital, including:
1. Calculating the cost of debt using the approximation method and after-tax rate for a 10% coupon bond maturing in 10 years.
2. Calculating the cost of preferred stock by dividing the annual dividend by the current price per share.
3. Calculating the weighted average cost of capital (WACC) using both book values and market values for debt, preferred stock, and common equity. The market value WACC is higher since common stock is valued above book value.
4. Additional examples are provided for calculating costs of specific capital components, as well as the weighted average cost of capital and weighted marginal
This document contains solutions to problems related to risk and return from Chapter 5. Problem P5-1 calculates rates of return for two investments. Investment X has a higher rate of return of 12.5% compared to 12.36% for Investment Y. Problem P5-1 concludes that Investment X should be selected. Problem P5-9 assesses the return and risk of two projects, Project 257 and Project 432, by calculating their expected returns, standard deviations, ranges, and coefficients of variation to determine which project has lower risk.
This document provides sample problems and solutions for calculating capital budgeting cash flows. It begins with an introduction stating the document will use 5-year projects and assets with lives equal to cash flow years. It then presents 18 sample problems covering topics like classification of expenditures, basic terminology, relevant cash flows, sunk costs, book value, taxes, depreciation, incremental cash flows, and expense reductions. The problems include calculations for initial investments, proceeds from asset sales, tax implications, and development of cash flow schedules to evaluate projects.
Chapter 3 the time value of money solutionQudratShahab
The document discusses the time value of money through examples of simple and compound interest calculations. It provides explanations and step-by-step workings for calculating future and present value using interest rates, time periods, and the compound interest, future value, and present value formulas. Sample questions are also included with full solutions showing calculations for topics like interest, annuities, and yield.
The Value of Money - problems and solutionsHassan Samoon
The document discusses the time value of money concepts. It provides explanations and examples of simple and compound interest, present and future value calculations, and annuities. It also includes sample problems and solutions demonstrating time value of money applications. Key concepts covered are interest rates, compounding periods, present and future value formulas, and using tables to determine interest factors for calculations.
(1) This document provides solutions to problems related to time value of money concepts such as future value, present value, and compound interest calculations.
(2) It includes examples of using the future value formula to calculate future values over different time periods and interest rates. It also shows how to use future value tables to solve for unknown time periods.
(3) Several problems demonstrate using the present value formula to calculate present values of future lump sums, and how higher discount rates result in lower present values. Comparisons are made between investment alternatives based on their present values.
(1) This document contains solutions to problems related to time value of money concepts such as compounding, discounting, future value, present value, and annuities.
(2) Financial managers rely more on present value than future value because they typically make decisions at time zero, as does the present value calculation.
(3) As the discount rate increases or the time until receipt of a future payment increases, the present value of that payment decreases. Higher discount rates or longer times reflect higher opportunity costs.
The document discusses value at risk (VAR) calculations for various portfolio scenarios. It provides examples of calculating 1-day, 10-day and annual VAR using standard deviations and confidence levels. It also demonstrates how to calculate VAR for combined portfolios accounting for correlations between assets. VAR is calculated for portfolios containing stocks, bonds, currencies and other financial instruments.
This document presents the statement of financial position and statement of comprehensive income for PT Luber and PT Al Caisario as of 31 December 2011 and 2010 respectively.
The statement of financial position of PT Luber shows total assets of Rp3.8 billion consisting of current assets, property and equipment, long term investments and intangible assets. Total liabilities are Rp2.7 billion comprising current and non-current liabilities. Total equity is Rp1.1 billion.
The statement of comprehensive income of PT Al Caisario for the year ended 31 December 2010 shows net income of Rp86 billion comprising income from continuing and discontinued operations, offset by comprehensive loss of Rp14 billion.
This document contains calculations for various financial problems. It includes calculations for:
1) Comparing the total value after 1 and 2 years for deposits in Bank A and Bank B, with Bank B earning more in both cases.
2) Calculating the future value of deposits of $5,000, $8,000, and $12,000 over different time periods with 6% interest.
3) Calculating the present value of an annuity of $20,000 over 4 years with 9% interest, both initially and deferred 2 years.
The document shows the work for several other calculations involving present and future values, annuities, and comparing expected returns and risk of stock and bond
This document provides solutions to end-of-chapter problems from several finance-related chapters. The problems solved include calculations related to capital budgeting, risk analysis, capital structure, derivatives, and multinational finance. Equations and numerical calculations are shown to arrive at solutions such as NPV, WACC, leverage ratios, exchange rates, and currency conversions. Financial calculators are also referenced as tools used to solve some of the problems.
Executive Directors Chat Leveraging AI for Diversity, Equity, and InclusionTechSoup
Let’s explore the intersection of technology and equity in the final session of our DEI series. Discover how AI tools, like ChatGPT, can be used to support and enhance your nonprofit's DEI initiatives. Participants will gain insights into practical AI applications and get tips for leveraging technology to advance their DEI goals.
it describes the bony anatomy including the femoral head , acetabulum, labrum . also discusses the capsule , ligaments . muscle that act on the hip joint and the range of motion are outlined. factors affecting hip joint stability and weight transmission through the joint are summarized.
ISO/IEC 27001, ISO/IEC 42001, and GDPR: Best Practices for Implementation and...PECB
Denis is a dynamic and results-driven Chief Information Officer (CIO) with a distinguished career spanning information systems analysis and technical project management. With a proven track record of spearheading the design and delivery of cutting-edge Information Management solutions, he has consistently elevated business operations, streamlined reporting functions, and maximized process efficiency.
Certified as an ISO/IEC 27001: Information Security Management Systems (ISMS) Lead Implementer, Data Protection Officer, and Cyber Risks Analyst, Denis brings a heightened focus on data security, privacy, and cyber resilience to every endeavor.
His expertise extends across a diverse spectrum of reporting, database, and web development applications, underpinned by an exceptional grasp of data storage and virtualization technologies. His proficiency in application testing, database administration, and data cleansing ensures seamless execution of complex projects.
What sets Denis apart is his comprehensive understanding of Business and Systems Analysis technologies, honed through involvement in all phases of the Software Development Lifecycle (SDLC). From meticulous requirements gathering to precise analysis, innovative design, rigorous development, thorough testing, and successful implementation, he has consistently delivered exceptional results.
Throughout his career, he has taken on multifaceted roles, from leading technical project management teams to owning solutions that drive operational excellence. His conscientious and proactive approach is unwavering, whether he is working independently or collaboratively within a team. His ability to connect with colleagues on a personal level underscores his commitment to fostering a harmonious and productive workplace environment.
Date: May 29, 2024
Tags: Information Security, ISO/IEC 27001, ISO/IEC 42001, Artificial Intelligence, GDPR
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Find out more about ISO training and certification services
Training: ISO/IEC 27001 Information Security Management System - EN | PECB
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This slide is special for master students (MIBS & MIFB) in UUM. Also useful for readers who are interested in the topic of contemporary Islamic banking.
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Main Java[All of the Base Concepts}.docxadhitya5119
This is part 1 of my Java Learning Journey. This Contains Custom methods, classes, constructors, packages, multithreading , try- catch block, finally block and more.
LAND USE LAND COVER AND NDVI OF MIRZAPUR DISTRICT, UPRAHUL
This Dissertation explores the particular circumstances of Mirzapur, a region located in the
core of India. Mirzapur, with its varied terrains and abundant biodiversity, offers an optimal
environment for investigating the changes in vegetation cover dynamics. Our study utilizes
advanced technologies such as GIS (Geographic Information Systems) and Remote sensing to
analyze the transformations that have taken place over the course of a decade.
The complex relationship between human activities and the environment has been the focus
of extensive research and worry. As the global community grapples with swift urbanization,
population expansion, and economic progress, the effects on natural ecosystems are becoming
more evident. A crucial element of this impact is the alteration of vegetation cover, which plays a
significant role in maintaining the ecological equilibrium of our planet.Land serves as the foundation for all human activities and provides the necessary materials for
these activities. As the most crucial natural resource, its utilization by humans results in different
'Land uses,' which are determined by both human activities and the physical characteristics of the
land.
The utilization of land is impacted by human needs and environmental factors. In countries
like India, rapid population growth and the emphasis on extensive resource exploitation can lead
to significant land degradation, adversely affecting the region's land cover.
Therefore, human intervention has significantly influenced land use patterns over many
centuries, evolving its structure over time and space. In the present era, these changes have
accelerated due to factors such as agriculture and urbanization. Information regarding land use and
cover is essential for various planning and management tasks related to the Earth's surface,
providing crucial environmental data for scientific, resource management, policy purposes, and
diverse human activities.
Accurate understanding of land use and cover is imperative for the development planning
of any area. Consequently, a wide range of professionals, including earth system scientists, land
and water managers, and urban planners, are interested in obtaining data on land use and cover
changes, conversion trends, and other related patterns. The spatial dimensions of land use and
cover support policymakers and scientists in making well-informed decisions, as alterations in
these patterns indicate shifts in economic and social conditions. Monitoring such changes with the
help of Advanced technologies like Remote Sensing and Geographic Information Systems is
crucial for coordinated efforts across different administrative levels. Advanced technologies like
Remote Sensing and Geographic Information Systems
9
Changes in vegetation cover refer to variations in the distribution, composition, and overall
structure of plant communities across different temporal and spatial scales. These changes can
occur natural.
How to Build a Module in Odoo 17 Using the Scaffold MethodCeline George
Odoo provides an option for creating a module by using a single line command. By using this command the user can make a whole structure of a module. It is very easy for a beginner to make a module. There is no need to make each file manually. This slide will show how to create a module using the scaffold method.
Azure Interview Questions and Answers PDF By ScholarHat
Chapter 16
1. Chapter 16
Hybrid and Derivative Securities
Solutions to Problems
P16-1. LG 2: Lease Cash Flows
Basic
Firm
Lease Payment Tax Benefit
After-t tflow
[(1) – (2)]
Year (1) (2)
ax Cash Ou
(3)
A 1–4 $1 $ $00,000 40,000 60,000
B 1–14
1
2
E 1–10 20,000 8,000 12,000
80,000 32,000 48,000
C 1–8 50,000 60,000 90,000
D 1–25 60,000 4,000 36,000
P16-2. terest
L Y Inte ount
LG 2: Loan In
Intermediate
oan ear rest Am
A $1 1,400
2 1
$
$312
$
$
3 3,220
,098
3 767
4 402
B 1 2,100
2 1,109
C 1
2 220
3 117
D 1 6,860
2 5,822
3 4,639
4 3,290
5 1,753
E 1 4,240
2 3,768
2. 394 Part 6 Special Topics in Managerial Finance
4 2,585
5 1,848
6 993
P16-3. LG 2: Loan Payments and Interest
Intermediate
Payment = $117,000 ÷ 3.889 = $30,085 (Calculator solution: $30,087.43)
Year Beginning
Balance Interest Principal
1 $117,000 $16,380 $13,705
2 103,295 14,461 15,624
3 87,671 12,274 17,811
4 69,860 9,780 20,305
5 49,555 6,938 23,147
6 26,408 3,697 26,388 $26,408
$116,980 $117,000
Note: Due to the PVIFA tables in the text presenting factors only to the third decimal place and
the rounding of interest and principal payments to the second decimal place, the summed principal
payments over the term of the loan will be slightly different from the loan amount. To compensate
in problems involving amortization schedules, the adjustment has been made in the last principal
payment. The actual amount is shown with the adjusted figure to its right.P16-4. LG 2: Lease
versus Purchase
3. Chapter 16 Hybrid and Derivative Securities 395
Challenge
(a) Lease
After-tax cash outflow = $25,200 × (l – 0.40 ) = $15,120/year for 3years + $5,000 purchase
option in year 3 (total for year 3: $20,120)
Purchase
Year
Loan
Payment
(1)
Main-
tenance
(2)
Depre-
ciation
(3)
Interest
at 14%
(4)
Total
Deductions
(2 + 3 + 4)
(5)
Tax
Shields
[(0.40) × (5)]
(6)
After-tax
Cash
Outflows
[(1 + 2) – (6)]
(7)
1 $25,844 $1,800 $19,800 $8,400 $30,000 $12,000 $15,644
2 25,844 1,800 27,000 5,958 34,758 13,903 13,741
3 25,844 1,800 9,000 3,174 13,974 5,590 22,054
(b)
End
of Year
After-tax
Cash Outflows PVIF8%,n PV of Outflows
Calculator
Solution
Lease
1 $15,120 0.926 $14,001
2 15,120 0.857 12,958
3 20,120 0.794 15,975
$42,934 $42,934.87
Purchase
1 $15,644 0.926 $14,486
2 13,741 0.857 11,776
3 22,054 0.794 17,511
$43,773 $43,773.06
(c) Since the PV of leasing is less than the PV of purchasing the equipment, the firm should lease
the equipment and save $962 in present value terms.
4. 396 Part 6 Special Topics in Managerial Finance
P16-5. LG 2: Lease versus Purchase
Challenge
(a) Lease
After-tax cash outflows = $19,800 × (1 – 0.40) = $11,880/year for 5 years plus $24,000
purchase option in year 5 (total $35,880).
Purchase
Year
Loan
Payment
(1)
Main-
tenance
(2)
Depre-
ciation
(3)
Interest
at 14%
(4)
Total
Deductions
(2 + 3 + 4)
(5)
Tax
Shields
[(0.40) × (5)]
(6)
After-tax
Cash Outflows
[(1 + 2) − (6)]
(7)
1 $23,302 $2,000 $16,000 $11,200 $29,200 $11,680 $13,622
2 23,302 2,000 25,600 9,506 37,106 14,842 10,460
3 23,302 2,000 15,200 7,574 24,774 9,910 15,392
4 23,302 2,000 9,600 5,372 16,972 6,789 18,513
5 23,302 2,000 9,600 2,862 14,462 5,785 19,517
(b)
End
of Year
After-tax
Cash Outflows PVIF9%,n PV of Outflows
Calculator
Solution
Lease
1 $11,880 0.917 $10,894
2 11,880 0.842 10,003
3 11,880 0.772 9,171
4 11,880 0.708 8,411
5 35,880 0.650 23,322
$61,801 $61,807.41
Purchase
1 $13,622 0.917 $12,491
2 10,460 0.842 8,807
3 15,392 0.772 11,883
4 18,513 0.708 13,107
5 19,517 0.650 12,686
$58,974 $58,986.46
(c) The present value of the cash outflows is less with the purchasing plan, so the firm should
purchase the machine. By doing so, it saves $2,827 in present value terms.
P16-6. LG 2: Capitalized Lease Values
Intermediate
Lease Table Values Calculator Solution
A $40,000 × 6.814 = $272,560 $272,547.67
B 120,000 × 4.968 = 596,160 596,116.77
C 9,000 × 6.467 = 58,203 58,206.78
D 16,000 × 2.531 = 40,496 40,500.72
E 47,000 × 7.963 = 374,261 374,276.42
5. Chapter 16 Hybrid and Derivative Securities 397
P16-7. LG 3: Conversion Price
Basic
(a) $1,000 ÷ 20 shares = $50 per share
(b) $500 ÷ 25 shares = $20 per share
(c) $1,000 ÷ 50 shares = $20 per share
P16-8. LG 3: Conversion Ratio
Basic
(a) $1,000 ÷ $43.75 = 22.86 shares
(b) $1,000 ÷ $25.00 = 40 shares
(c) $600 ÷ $30.00 = 20 shares
P16-9. LG 3: Conversion (or Stock) Value
Basic
(a) Bond value = 25 shares × $50 = $1,250
(b) Bond value = 12.5 shares × $42 = $525
(c) Bond value = 100 shares × $10.50 = $1,050
P16-10.LG 3: Conversion (or Stock) Value
Basic
Bond Conversion Value
A 25 × $42.25 = $1,056.25
B 16 × $50.00 = $800.00
C 20 × $44.00 = $880.00
D 5 × $19.50 = $97.50
P16-11.LG 4: Straight Bond Values
Intermediate
Bond Years Payments Factors PV
Calculator
Solution
A 1–20 $100 6.623 $662.30
20 1,000 0.073 73.00
$735.30 $735.07
B 1–14 $96 5.724 $549.50
14 800 0.141 112.80
$662.30 $662.61
C 1–30 $130 6.177 $803.01
30 1,000 0.012 12.00
$815.01 $814.68
D 1–25 $140 5.766 $807.24
25 1,000 0.020 20.00
$827.24 $827.01
6. 398 Part 6 Special Topics in Managerial Finance
P16-12.LG 4: Determining Values–Convertible Bond
Challenge
(a)
Years Payments Factor, 12% PV Calculator Solution
1–20 $100 7.469 $746.90
20 1,000 0.104 104.00
$850.90 $850.61
(b) Conversion value = 50 shares × market price
50 × $15 = $750
50 × $20 = 1,000
50 × $23 = 1,150
50 × $30 = 1,500
50 × $45 = 2,250
(c)
Share Price Bond Value
$15 $850.90
20 1,000.00
23 1,150.00
30 1,500.00
45 2,250.00
As the share price increases the bond will start trading at a premium to the pure bond value
due to the increased probability of a profitable conversion. At higher prices the bond will
trade at its conversion value.
(d) The minimum bond value is $850.90. The bond will not sell for less than the straight bond
value, but could sell for more.
P16-13.LG 4: Determining Values–Convertible Bond
Challenge
(b) Straight Bond Value
Years Payments Factor, 12% PV Calculator Solution
1–15 $130 5.575 $724.75
15 1,000 0.108 108.00
$832.75 $832.74
(b) Conversion value
$9.00 × 80 = $720
12.00 × 80 = 960
13.00 × 80 = 1,040
15.00 × 80 = 1,200
20.00 × 80 = 1,600
7. Chapter 16 Hybrid and Derivative Securities 399
(c)
Share Price Bond Value
$9.00 $832.75 (Bond will not sell below straight bond value)
12.00 960.00
13.00 1,040.00
15.00 1,200.00
20.00 1,600.00
As the share price increases the bond will start trading at a premium to the pure bond value
due to the increased probability of a profitable conversion. At higher prices the bond will
trade at its conversion value.
(d)
Value of a Convertible Bond
0
200
400
600
800
1000
1200
1400
1600
1800
0 5 10 15 20 25
Straight Bond
Value
Conversion
Value
XValue of
Convertible
Bond
Price per Share of Common Stock
Up to Point X, the Straight Bond Value is the minimum market value. For stock prices above
Point X, the Conversion Value Line is the market price of the bond.
8. 400 Part 6 Special Topics in Managerial Finance
P16-14.LG 5: Implied Price of Attached Warrants
Intermediate
Implied price of all warrants = Price of bond with warrants − Straight bond value
Implied Price of all warrants
Price per warrant
Number of warrants
=
Straight Bond Value:
Bond Years Payments Factors PV
Solution
Calculator
A 1–15 $120 6.462 (13%) $775.44
15 1,000 0.160 160.00
$935.44 $935.38
B 1–10 $95 5.650 (12%) $536.75
10 1,000 0.322 322.00
$858.75 $858.75
C 1–20 $50 7.963 (11%) $398.15
20 500 0.124 62.00
$460.15 $460.18
D 1–20 $110 7.469 (12%) $821.59
20 1,000 0.104 104.00
$925.59 $925.31
Price Per Warrant:
Bond
Price with
Warrants −
Straight
Bond Value =
Implied
Price ÷
Number
of Warrants =
Price per
Warrant
A $1,000 – $935.44 = $64.56 ÷ 10 = $6.46
B 1,100 – 858.75 = 241.25 ÷ 30 = 8.04
C 500 – 460.15 = 39.85 ÷ 5 = 7.97
D 1,000 – 925.59 = 74.41 ÷ 20 = 3.72
P16-15.LG 5: Evaluation of the Implied Price of an Attached Warrant
Challenge
(a) Straight Bond Value
Years Payments PVIF (13%) PV
Calculator
Solution
1–30 $115 7.496 $862.04
30 1,000 0.026 26.00
$888.04 $ 887.57
(b) Implied price of all warrants = (Price with warrants – Straight Bond Value)
Implied price of warrant = $1,000 – $888.04
Implied price of warrant = $111.96
9. Chapter 16 Hybrid and Derivative Securities 401
(c) Price per warrant = Implied price of all warrants ÷ number of warrants
Price per warrant = $111.96 ÷ 10
Price per warrant = $11.20
(d) The implied price of $11.20 is below the theoretical value of $12.50, which makes the bond
an attractive investment.
P16-16.LG 5: Warrant Values
Challenge
(a) TVW = (P0 – E) × N
TVW = ($42 – $50) × 3 = –$24
TVW = ($46 – $50) × 3 = –$12
TVW = ($48 – $50) × 3 = –$6
TVW = ($54 – $50) × 3 = $12
TVW = ($58 – $50) × 3 = $24
TVW = ($62 – $50) × 3 = $36
TVW = ($66 – $50) × 3 = $48
(b)
Common Stock Price versus Warrant Price
-30
-20
-10
0
10
20
30
40
50
60
40 45 50 55 60 65 70
Market
Value
Value of
Warrant ($)
Theoretical
Value
Price per Share of Common Stock
(c) It tends to support the graph since the market value of the warrant for the $50 share price
appears to fall on the market value function presented in the table and graphed in part (b).
The table shows that $50 is one-third of the way between the $48 and the $54 common
stock value; adding one-third of the difference in warrant values corresponding to those
stock values (i.e., ($18 – $9) ÷ 3) to the $9 warrant value would result in a $12 expected
warrant value for the $50 common stock value.
(d) The warrant premium results from a combination of investor expectations and the ability
of the investor to obtain much larger potential returns by trading in warrants rather than
stock. The warrant premium is reflected in the graph by the area between the theoretical
value and the market value of the warrant.
10. 402 Part 6 Special Topics in Managerial Finance
(e) Yes, the premium will decline to zero as the warrant expiration date approaches. This occurs
due to the fact that as time diminishes, the possibilities for speculative gains likewise decline.
P16-17.LG 5: Common Stock versus Warrant Investment
Challenge
(a) $8,000 ÷ $50 per share = 160 shares
$8,000 ÷ $20 per warrant = 400 warrants
(b) 160 shares × ($60 – $50) = $1,600 profit $1,600 ÷ $8,000 = 20%
(c) 400 shares × ($45 – $20) = $10,000 profit $10,000 ÷ $8,000 = 125%
(d) Ms. Michaels would have increased profitability due to the high leverage effect of the
warrant, but the potential for gain is accompanied with a higher level of risk.
P16-18.LG 5: Common Stock versus Warrant Investment
Challenge
(a) $6,300 ÷ $30 per share = 210 shares purchased
210 shares × ($32 – $30) = $420 profit $420 ÷ $6,300 = 6.67%
(b) $6,300 ÷ $7 per warrant = 900 warrants purchased
Profit on original investment = [($4 per share × 2) – $7 price of warrant] = $1
$1 gain × 900 warrants = $900 profit $1 ÷ $7 = 14.29% total gain
(c) Stock (1) $6,300 investment – $6,300 proceeds from sale = $0
(2) 210 shares × ($28 – $30) = –$420 (–6.67%)
Warrants (1) [($2 gain per share × 2 shares) – $7 price of warrant] × 900 warrants
= –$3 × 900 = –$2,700 = –42.85%
(2) Since the warrant exercise price and the stock price are the same, there is no
reason to exercise the warrant. The full investment in the warrant is lost:
$7 × 900 warrants = $6,300 – $7 ÷ $7 = –100%
(d) Warrants increase the possibility for gain and loss. The leverage associated with warrants
results in higher risk as well as higher expected returns.
P16-19.LG 6: Option Profits and Losses
Intermediate
Option
A 100 shares × $5/share = $500
$500 – $200 = $300
B 100 shares × $3/share = $300
$300 – $350 = –$50
The option would be exercised, as the loss is less than the cost of the option.
C 100 shares × $10/share = $1,000
$1,000 – $500 = $500
D –$300; the option would not be exercised.
E –$450; the option would not be exercised.
11. Chapter 16 Hybrid and Derivative Securities 403
P16-20.LG 6: Call Option
Intermediate
(a) Stock transaction:
$70/share – $62/share= $8/share profit
$8/share × 100 shares = $800
(b) Option transaction:
($70/share × 100 shares) = $7,000
– ($60/per share × 100 shares) = –6,000
– $600 cost of option = –600
profit = $400
(c) $600 ÷ 100 shares = $6/share
The stock price must rise to $66/share to break even.
(d) If Carol actually purchases the stock, she will need to invest $6,200 ($62/share × 100 shares)
and can potentially lose this full amount. In comparison to the option purchase, Carol only
risks the purchase price of the option, $600. If the price of the stock falls below $56/share,
the option purchase is favored. (Below $56/share, the loss in stock value of $600 [($62 –
$56) × 100 shares], would exceed the cost of the option). Due to less risk exposure with the
option purchase, the profitability is correspondingly lower.
P16-21.LG 5: Put Option
Intermediate
(a) ($45 – $46) × 100 shares = –$100
The option would not be exercised above the striking price; therefore, the loss would be the
price of the option, $380.
($45 – $44) × 100 shares = $100
$100 – $380 = –$280
The option would be exercised, as the amount of the loss is less than the option price.
($45 – $40) × 100 shares = $500
$500 – $380 = $120
($45 – $35) × 100 shares = $1,000
$1,000 – $380 = $620
(b) The option would not be exercised above the striking price.
(c) If the price of the stock rises above the striking price, the risk is limited to the price of the put
option.
P16-22.Ethics Problem
Challenge
When a company issues a stock and sells it at market price and keeps the proceeds then it
increases the number of shares outstanding and dilution of earnings takes place. However, when
the company issues stock to acquire assets, or pays a part of operating costs, these costs become
expenses. Similarly, when the company issues stock in exchange for options to be exercised by
employees below the market price, this is equivalent to issuing the stock at the market price and
paying the difference to the employees in cash, which is clearly an expense.