Consider a stock with current price $50 and a European call of 3-month with exercise price $60. Suppose that after three months, the stock price will either go up to $75 or go down to $30. The risk-free interest rate for three months is 5%,please calculate the price of the call.
ABC Electric's common stock has a beta of 1.3. The Treasury Bill rate is 6 percent and the market risk premium is estimated at 9 percent. Half of ABC’s total market value of $10 million is comprised of equity, and the remaining half is comprised of debt paying 8 percent interest. ABC’s tax rate is 40 percent.
A.What is ABC’s cost of equity capital?
C.Suppose ABC has an opportunity to undertake a new project that has the same risk as its existing business. Should ABC undertake the project if it has an internal rate of return of 15 percent?
Estimated cash nows for proJectsA and B are (where initial costs are in the brackets):
a.Assume the discount rate (the opportunity cost of capital) for projectsA and B is: r
Wbat are the NPVs for ProjectsA and B?
b.In the preceding example, which project shall be chosen if the discount rate r =1.0and both the projects are mutually exclusive? Can you explain why the result
is different from (a)?
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