FI516-Advanced Financial Management
Spring 2011

Week 3 Assignment

Chap 8-1
Exercise value = $30 (Current stock price) – $25 (strike price) = $5
Time value = $7 (Option price) – $5 (Exercise value) = $2
Chap 8-2
Time Value = Market price of option - Exercise value $5 = V - $22 V = $27.
Exercise value = P0 - Strike price $22 = P0 - $15 P0 = $37.

Chap 15-8 a. = D + S = 0 + ($15/share)(200,000 # share) = $3,000,000(value)
WACC = wd rd(1-T) + wcers = 0 + (1.0)(0.10) = 10%
WACC = wd rd(1-T) + wcers = (0.30)(.07)(1-0.40taxes) + (0.70)(.11)
= 8.96%.

b.
Debt = wd V
= 0.30($3,000,000) = $900,000
S = V – D = $900,000
P = [S + (D – D0)]/n0 = [$200,000 + ($900,000) – 0)]/200,000 = $5.50

c.
X = (D – D0)/P
= $200,000 / $5.50 = 36363.636

n = 200,000 – 36363.636 = 163636.364. Initial position
EPS = NI/n0
= [(EBIT – Int.)(1-T)] / n0 = [($500,000 – 0)(1-0.40)] / 200,000 = $1.50.

Using financial leverage
EPS = [($500,000 – 0.07($200,000) (1-0.40)] / 163636.364
= [($500,000 – $14000) (1-0.40)] / 163636.364
= $486,000 / 163636.364
= $1.782
If we add more debt the EPS will increase

d. with 30% in debt
TIE = = EBIT/I
=EBIT/14,000
Probability TIE 0.10 (7.14)
0.20 14.2
0.40 35.71
0.20 57.14 0.10 78.57

Chap 23-3
Settled at 100 16/32% of $100,000
$100,000/100= $1000
Present value =1000*1.005=$1,005
Contract new value =1,005*100= $100,500

Chap 23-4
Net cash= -(LIBOR +2%) floating rate – 7.95% (fixed rate)+ LIBOR= -9.95% 9.95% < 10% this is a green light for carter the usage of a fixed rate debt and engaged in the swap contract
OR
11% + 7.95% -LIBOR = -(LIBOR +