A Company has to make a choice between two strategies:
Strategy 1: expected to result in a market price now of $100 per
share of common stock and a price of $120 five years from
now.
Strategy 2: expected to result in a market price now of $80 and a
price of $140 five years from now.
What do you recommend? Assume that all other things are unaffected
by the decision being considered.
Going by the assumption that all other things are unaffected by the decision being considered and all the other things remaining constant, the main goal for any organization is to maximize its shareholders’ wealth in the long run. As a general rule under Modern Finance theory, investors prefer to receive more ‘expected’ return than less ‘expected’ return in future.
Second thing that turns the choice in favour of Strategy 2 is the rate of return. In strategy 1, the growth is only $20, over a base of $100, which is only 20% return (not annualized) received over 5 years.
Whereas, under strategy 2, it’s a growth of $60, over base of $80, which is close to 75% return (not annualized) received over a period of 5 years.
The above 2 reasons makes Strategy 2 a better alternative than Strategy 1.
A Company has to make a choice between two strategies: Strategy 1: expected to result in...
A monopolist is considering a choice between two alternative pricing strategies: (i) perfect price discrimination and (i) two-part pricing. Assume both strategies are feasible and the demand side of the market comprises identical consumers. Determine which of the two strategies will earn the monopolist the greatest profit For each strategy, determine the share of consumer surplus the monopolist is able to extract as profit. b.
A monopolist is considering a choice between two alternative pricing strategies: (i) perfect price discrimination...
The following strategies were discussed in the video lecture on options strategies. Given the following scenarios, indicate which strategy you would use and why. Strategies Protective Put Covered Call Spread Straddle Collar 1. As part of your inheritance, you received shares of stock in a company as part of a trust fund. You are restricted from selling the shares of stock for five years. You don't think that the firm is being managed well and that the price will fall...
1. Elementary Option Trading Strategies (Covered call writing and Floors) Suppose an investor owns 100,000 shares of IBM stock at $120 per share. If the investor expects no large price rise and possible drop in price, he or she) sells 100,000 December 125 call option at $7, receiving $700,000. a. (5 points) If IBM stock drops only slightly from $120 to $113, what is the profit associated with the covered call writing strategy? b. (5 points) If IBM stock rises...
1. Draw payoff diagrams for the following option trading strategies. Assume all options have the same expiration date. a. Buy a share and write a call on the stock b. Buy a call with exercise price X1 and write a call with an exercise price X2 on the same stock, with X1 < X2. c. Buy a call with exercise price X1, sell two calls with exercise price X2 and buy a call with exercise price X3 with X1 X2...
Functions 1. You are presented with two investment strategies for the next ten years. In strategy A, you deposit $300 into an account at the end of each month for the next four years, then allow the account to accumu- late interest for the remaining six years. In strategy B, you do nothing for five years and then deposit $300 at the start of each month for the remaining five years. In both cases, interest is paid at the rate...
2. Expected returns Suppose you won the lottery and had two options: (1) receiving $1 million or (2) a gamble in which you would receive $2 million if a head were flipped but zero is a tail came up. a. What is the expected value of the gamble? b. Would you take the sure $1 million or the gamble? c. If you chose the sure $1 million, would that indicate that you are a risk averter or a risk seeker?...
1. Compute the expected return for a company that will be traded at $100, $120, and $140 next period with probabilities 20%, 40%, and 40%, respectively. The price of that company today is $110. 2. Compute the correlation between assets A and B if you know that the standard deviation of B is 50% of the standard deviation of A and the covariance between the two assets is 0.5 times the variance of asset A. 3. What is the risk...
please someone help me solve the two questions !!!
9. The current dividend of MultiGrowth Inc. is $1.5. The company is expected to grow rapidly for the next 3 years at 30%, at the end of which time the new growth rate is expected to be a constant 8% a year. The required rate of return is 15%. What is the intrinsic value of the firm? A. $39.21 B. $39.50 C. $38.68 D. $39.59 10. Consider the following short sale...
1. Company A sold 100,000 shares in an initial public offering. The underwriter's explicit fees were $90,000. The offering price for the shares was $30, but immediately upon issue, the share price jumped to $43. What is the net proceeds this company receives from this offering? 2. If you are pessimistic about stock A and its market price is $100/share. You short sell 1,000 shares. Suppose the stock A price falls to $70/share. You close your position and what is...
1. Consider the coupon game. But suppose that instead of
decisions being made simultaneously, they are made sequentially,
with Firm 1 choosing first, and its choice observed by Firm 2
before Firm 2 makes its choice.
a. Draw a game tree representing this game.
b. Use backward induction to find the solution. (Remember that
your solution should include both firms’ strategies, and that Firm
2’s strategy should be complete!)
2. Two duopolists produce a homogeneous product, and each has a...