Question

RTF stock is currently priced at $37.13 a share. The only options on this stock are the March $45 call option, which is priced at $1.72, and the March $45 put which is priced at $7.99. Flo would like the option to purchase 300 shares of RTF should the price suddenly rise as she expects. Her main concern is that the price will double after hours and she will miss out on some potential profits. She also realizes the stock is highly risky and she could lose her entire investment, which she prefers not to do. What should she do to help offset her concerns?

A.

Buy 3 call option contracts at a cost of $516

B.

Sell 3 call option contracts and receive $516

C.

Buy 300 call option contracts at a cost of $5.16

D.

Buy 3 put option contracts at a cost of $23.97

QZinc Furniture has 77,000 shares of stock outstanding with a par value of $0.50 per share. The current market value of the firm is $8,280,000. The balance sheet shows a balance of $1,142,000 in the capital in excess of par value account and retained earnings of $2,234,000. The company just announced a 7-for-2 stock split. What will be the market price per share after the split?

A.

$43.89

B.

$376.36

C.

$30.72

D.

$107.53

Apisco Inc. has 4,300 bonds outstanding with a face value of $1,000 each and a coupon rate of 6.5 percent. What is the amount of the annual interest tax shield if the tax rate is 35 percent?

A.

$99,100

B.

$181,675

C.

$97,825

D.

$101,150

A levered firm has a pretax cost of debt of 7.8 percent and an unlevered cost of capital of 14 percent. The tax rate is 35 percent and the cost of equity is 16.25 percent. What is the debt-to-equity ratio?

	A.	0.56
	B.	0.47
	C.	0.53
	D.	0.41

Answer 1

1)

One call option contract is for 100 shares. The best way to safeguard against loss due to fall in share price and also stand a chance to gain from rise in share price is through call options.

So the correct option is a) Buy 3 call option contracts at a cost of $516

2)

Nos. of share o/s = 77000

Market value = $8,280,000

Price = 107.53

Market value after 7 for 2 split = 107.53 * 2 / 7 = $ 30.72

3)

Annual coupon payment per bond = 6.5%*1000 = 65

For all bonds = 4300 X 65 = $ 279500

Interest shield = 35% * $ 279500 = $97825

So correct answer is c) $ 97825

4)

Re = Rul + (Rul – Rd)*D/E *(1-t)

0.1625 = 0.14 + (0.14 – 0.078)*D/E *(1-0.35)

D/E = 0.56