Question

please answer all 3!!

QUESTION 13 You live in a make-believe world with no taxes, no costs of financial distress, no asymmetric information, etc. Assume that your firm currently has zero debt in its capital structure. Your firm's weighted average cost of capital is likely to go down if you issue debt and buy back shares of stock True False QUESTION 14 You have a short position in a call option on Proctor & Gamble stock. If Procter & Gamble closes at $6.50 on the day that the option expires and the strike price is $5.40, what wil be your gross payoff per share (10. not accounting for the upfront premium)? QUESTION 15 Anheuser Busch has issued a bond with the following characteristics: maturity: 19 vears, coupon rate: 7.5% (paid semi-annually). face value: $1000. Your investment advisor has told you that the yield-to-maturity on this bond is 6.5%. What should be the price of this bond

Answer 1

Answer 13)

Where there are no taxes the Overall Cost of Capital will decrease when the Debt is increased as the Cost of Debt is usually lower thant he cost of Equity.

The given statement is true.

Answer 14)

Gross Payoff = Closing Price - Strike Price

= 6.50 - 5.40

= 1.1 loss

loss will occur as the Closing Price is higher then the Strike Price. The Call buyer will exercise the option and make profit. The Call seller will have the same amount of loss.

Payoff (- 1.1)

Answer 15)

Value of Bond =
1 1 (1+r)" Coupon * + MaturityValue (1 + r)" 7

Where r is the discounting rate of a compounding period i.e. 6.5%/ 2 = 3.25%

And n is the no of Compounding periods 19 years * 2 = 38

Coupon 7.5% / 2 = 3.75%

=

1- 37.5 1 (1+0.032555 0.0325 + 1000 (1+0.0325 ) 38

= $1108.21

NOTE: The answer to your question has been given below/above. If there is any query regarding the answer, please ask in the comment section. If you find the answer helpful, do upvote. Help us help you.