Advanced Finance Essay

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Problem No. 1 on Options based on Chapter 8 A Call Option on the stock of XYZ Company has a market price of $9.00. The price of the underlying stock is $36.00, and the strike price of the option is $30.00 per share. What is the Exercise Value of this Call Option? What is the Time Value of the Option? Exercise Value = Stock Price - Strike Price Exercise Value = 36 - 30 = 6 Time Value = Market Price - Exercise Value Time Value = 9 - 6 = 3 Problem No. 2 on Options based on Chapter 8 The Exercise (Strike) Price on ABC Company’s Option is $21.00, its Exercise Value is $23.00, and its Time Value is $7.00. What is the Market Value of the Option? What is the price of the underlying stock? Market Price = Exercise Value + Time Value Market Price = 23 + 7 = 30 Stock Price = Exercise Value + Strike Price Stock Price = 23 + 21 = 44 Problem on Capital Structure Change – Chapter 15 – No. 4 (15–4) Value of Equity after Recapitalization Nichols Corporation’s value of operations is equal to $500 million after a recapitalization (the firm had no debt before the recap). It raised $200 million in new debt and used this to buy back stock. Nichols had no short-term investments before or after the recap. After the recap, wd = 40%. What is S (the value of equity after the recap)? S = (200 million / .40) - 200 million S = 500 million - 200 million S = 300 million Problem on Capital Structure Change – Chapter 15 – No. 6 (15–6) Shares Remaining after Recapitalization Dye Trucking raised $150 million in new debt and used this to buy back stock. After the recap, Dye’s stock price is $7.50. If Dye had 60 million shares of stock before the recap, how many shares does it have after the recap? Shares = 60 million - (150 million / 7.50) Shares = 60 million - 20 million Shares = 40 million Problem on Swaps based on Chapter 23 Company A can issue

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