Deng inc has a target debt-equity ratio of 04 itrsquos


Instruction: Prove your answers mathematically using formula or Excel in order to receive credit for each  question

1.  a. Why do investors pay a premium to buy a call and a put option?

      b. N(d1) and N(d2) are essential to the Black-Scholes model.  What kind of probabilities do these terms represent?

2. Deng Inc. has a target debt-equity ratio of 0.4. It’s before-tax  cost of equity is 16 %  and it’s before-tax cost of debt is 8%. If the tax rate is 32%, what is Deng’s WACC?

3. Virgo Hotels has taxable income this year of $7,500,000 and faces the U.S. Corporate Tax Schedule/Rates shown on page 77 of course textbook(see also Lecture 2 PowerPoint). What will be the company’s tax bill?

4. Stock A, which has a beta of 1.2 is currently selling for $50 per share and will pay a dividend of $2.50 per share this year. On the basis of the company’s strong growth, you expect the stock price to be $54 per share at the end of 1 year. The current risk-free rate is 7%, and the market return is 13%. Using the Capital Asset Pricing Model (CAPM),  calculate the stock’s required rate of return. Should you purchase the stock?

5. The last dividend paid by stock A was $2 per share. With a 9% required rate of return, calculate the market value of this stock if the growth rate is:

a. No growth

b. 2% growth

c. 5% growth

6. A bond, with a face value(par value) of $150, is paying $25 coupon annually. The bond will mature in 10 years and the market rate of interest is 10%. 

a. What is the current price of the bond?

b. Is the bond selling at premium or discount?

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Financial Management: Deng inc has a target debt-equity ratio of 04 itrsquos
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