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Question
A firm has zero debt in its capital structure. Its overall cost of capital is 10%. The firm is considering a new capital structure with 60% debt. The interest rate on the debt would be 8%. Assuming there are no taxes its cost of equity capital with the new capital structure would be:
A. 8%
B. 16%
C. 13%
D. 10%
E. None of the above
Answer
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Related questions
Q:
Suppose VS's stock price is currently $20. In the next six months it will either fall to $10 or rise to $30. What is the current value of a put option with an exercise price of $15? The six-month risk-free interest rate is 5% (periodic rate).
A. $5.00
B. $2.14
C. $0.86
D. $7.86
Q:
Suppose Ralph's stock price is currently $50. In the next six months it will either fall to $30 or rise to $80. What is the option delta of a call option with an exercise price of $50?
A. 0.375
B. 0.500
C. 0.600
D. 0.75
Q:
A call option has an exercise price of $100. At the final exercise date, the stock price could be either $50 or $150. Which investment would combine to give the same payoff as the stock?
A. Lend PV of $50 and buy two calls
B. Lend PV of $50 and sell two calls
C. Borrow $50 and buy two calls
D. Borrow $50 and sell two calls
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Explain what implied volatility, as measured by the VIX, may mean to the overall stock market.
Q:
Briefly explain the term "option delta."
Q:
Briefly explain risk-neutral valuation in the context of option valuation.
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Briefly explain why an option is always riskier than the underlying stock.
Q:
A knock-in barrier option might be used if the investor is looking to reduce the cost of buying a call option.
Q:
The binomial model is a discrete time model.
Q:
Using the binomial model, what is the value of a three month option given the following data and assuming there are no time periods other than three months? The exercise price is $40; stock price is $46; the upside price is $48; the downside price is $34; the 3 month interest rate is 2%. The upside and down side have equal probabilities.
A. $3.92
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Q:
The Black-Scholes OPM is dependent on which five parameters?
A. Stock price, exercise price, risk free rate, beta, and time to maturity
B. Stock price, risk free rate, beta, time to maturity, and variance
C. Stock price, risk free rate, probability, variance and exercise price
D. Stock price, exercise price, risk free rate, variance and time to maturity
Q:
If the standard deviation of annual returns on the asset is 20% and the interval is half a year, then the downside change is equal to:
A. 37.9%
B. 19.3%
C. 20.1%
D. 13.2%
Q:
23. If "u" equals the quantity (1 + upside change), then the quantity (1 + downside change) is equal to:
A. -u
B. -1/u
C. 1/u
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Q:
Why would an option holder almost never exercise an option early?
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Briefly explain how an option holder gains from the volatility of the underlying stock price.
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Explain the main differences between the position diagrams and the profit diagrams.
Q:
Define the term "put option."
Q:
Define the term "call option."
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All things being equal, the closer an option gets to expiration, the lower the option price.
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What is SEC Rule 10b-18? Briefly explain.
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If you accept the dividend irrelevancy theory, it is possible to maintain a high dividend clientele and still fund future growth.
Q:
Australia follows the imputation tax system.
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Dividend payments are used to change the capital structure by replacing equity with debt.
Q:
If investors do not like dividends because of the additional taxes that they have to pay, how would you expect stock prices to behave on the ex-dividend date?
A. Fall by more than the amount of the dividend
B. Fall exactly by the amount of the dividend
C. Fall by less than the amount of the dividend
D. Cannot be predicted
Q:
One key assumption of the Miller and Modigliani (MM) dividend irrelevance argument is that:
A. Future stock prices are certain
B. There are no capital gains taxes
C. All investments are risk-free
D. New shares are sold at a fair price
Q:
Generally, investors view the announcement of open-market repurchase of stocks as:
A. bad news and the stock price drops
B. good news and the stock price increases
C. a non-event and does not affect the stock prices
D. very good news and the stock price jumps up
Q:
Generally, investors interpret the announcement of a decrease in dividends as:
A. bad news and the stock price drops
B. good news and the stock price increases
C. a non-event and does not affect the stock prices
D. very good news and the stock price jumps up
Q:
Generally, investors interpret the announcement of an increase in dividends as:
A. bad news and the stock price drops
B. good news and the stock price increases
C. a non-event and does not affect the stock price
D. very bad news and the stock price plunges