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?