Please answer the following finance questions. PLEASE SHOW AND EXPLAIN ALL WORK!
ID: 2622109 • Letter: P
Question
Please answer the following finance questions. PLEASE SHOW AND EXPLAIN ALL WORK!
1. Sisters Madonna and Ellen jointly own Pico Peak Corporation. Madonna's share is 50% of the business. The value of the corporation is $150,000 and its risk in terms of sigma is 0.6. Madonna would like to buy Ellen out and offers her cash, equivalent to Ellen's share, or a note for $80,000 payable by Pico Peak Corporation after 2 years. The riskless rate is 3.4%. Find the value of the cash offer, and the value of the note. Should Ellen take the cash or the note?
2. Jay and Demsey bought Smugglers Notch Company for $5 million by investing $2.5 million each. Jay was a stockholder, and thus the owner of the company. The corporation agreed to pay Demsey $5 million after ten years for his share of the business. However, by mutual agreement, they sold the business after 6 years for $8 million and divided the money according to the option pricing theory. The riskless rate at the time was 3.1%, and the sigma of Smugglers Notch Company was 0.55. Find the amount of money that went to Jay and to Demsey.
3. Skye Peak Corporation bought 200 shares of Tesla Motors stock at $235 per share. At the same time, it sold call options on 100 shares with exercise price $240, expiring after 303 days, at $41.85 per share. Skye Peak also sold calls on 100 shares, with exercise price $250, maturing after 303 days, at $37.95 per share. When the options expired, the stock was trading at $245 per share. Ignore transaction costs and dividends. Find the following:
(A) The initial value of the investment
(B) The final value of the investment
(C) The profit in this investment, defined as the difference between (A) and (B)
(D) The risk-adjusted discount rate in this investment is 10%. Using continuous discounting, find the NPV of this investment.
4. Ramshead Corporation has bought 300 shares of Apple stock at $528.70 per share. It has sold call options on 100 shares, with exercise price $530, for $18 each; and options on 200 shares, exercise price $540, for $13.63 each. All options will expire after 57 days and then Ramshead will liquidate this position. Ramshead expects the price of Apple stock after 57 days to be $535 per share. It uses 12% as the discount rate, with continuous compounding. Calculate the following:
(A) The initial investment
(B) The final liquidation value
(C) NPV of this investment
Explanation / Answer
3)
A) Initial value = 200*235 - 100*41.85 - 100*37.95 = $39020
B)Final value = 200*245 - 5*100 = $48500
C) Profit = Final value - Initial value = 48500 - 39020 = $9480
D) Profit = Final value/e^(r*t) - Initial value = 48500/e^(0.1*303/365) - 39020 = $5616.40
4)
A) Initial value = 300*528.70 + 100*18 + 200*13.63 = $154084
B)Final value = 300*535 - 100*18*e^(0.12*57/365) - 200*13.63*e^(0.12*57/365) -5*100 = $160000
C) NPV = Final value/e^(0.12*57/365) - Initial value = $2945.56