Problem 8-4 Put-Call Parity The current price of a stock is $32, and the annual risk-free rate is… 1 answer below »

 
   

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Problem 8-4

Put-Call Parity

The current price of a stock is $32, and the annual risk-free rate is 4%. A call option with a strike price of $30 and 1 year until expiration has a current value of $6.10. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Round your answer to the nearest cent.

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Problem 9-1

After-Tax Cost of Debt

Calculate the after-tax cost of debt under each of the following conditions:

Interest rate of 12%; tax rate of 0%. Round your answer to two decimal places.

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Interest rate of 12%; tax rate of 15%. Round your answer to two decimal places.

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Interest rate of 12%; tax rate of 30%. Round your answer to two decimal places.

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Problem 9-7

WACC

Shi Importers' balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi's tax rate is 40%, rd = 8%, rps = 7.1%, and rs = 10%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is its WACC? Round your answer to two decimal places.

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Problem 9-9

Bond Yield and After-Tax Cost of Debt

A company's 8% coupon rate, semiannual payment, $1,000 par value bond that matures in 25 years sells at a price of $656.32. The company's federal-plus-state tax rate is 30%. What is the firm's after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Round your answer to two decimal places.

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Problem 9-10

Cost of Equity

The earnings, dividends, and common stock price of Shelby Inc. are expected to grow at 6% per year in the future. Shelby's common stock sells for $29.50 per share, its last dividend was $2.00, and the company will pay a dividend of $2.12 at the end of the current year.

Using the discounted cash flow approach, what is its cost of equity? Round your answer to two decimal places.

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If the firm's beta is 2.1, the risk-free rate is 8%, and the expected return on the market is 14%, then what would be the firm's cost of equity based on the CAPM approach? Round your answer to two decimal places.

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If the firm's bonds earn a return of 10%, and analysts estimate the market risk premium is 3 to 5 percent, then what would be your estimate of rs using the over-own-bond-yield-plus-judgmental-risk-premium approach? Round your answer to two decimal places. (Hint: Use the midpoint of the risk premium range).

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On the basis of the results of parts a through c, what would be your estimate of Shelby's cost of equity? Assume Shelby values each approach equally. Round your answer to two decimal places.

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