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Financial Management 540 Assignment 5 Spring 2014




Question;Financial ManagementAssignment 51. BYO stock currently sells for $46.50 a share. A 3-month call option on BYO stock with a strike priceof $50.20 is priced at $0.20. Risk-free assets are currently returning 0.25 percent per month.According to the put-call parity relation, what should be the price of a 3-month put on BYO stockwith a strike price of $50.20? (5 points)2. Prior to its most recent earnings announcement, you purchased two out-of-the-money ACAT call option contracts (remember that an option contract is for 100 options) with a strike price of $50 for$0.85 per option, when ACAT?s stock price was $48.75. Last week?s earnings announcement was adisappointment and the stock dropped by nearly $10 per share. The option expires today when thevalue of ACAT stock is $40.75. Ignoring any transaction costs, what is your total profit or loss onthis investment? (5 points)3. You wrote four call option contracts (remember that an option contract is for 100 options) on JIGstock with a strike price of $41 and an option price of $4.00. Ignoring any transaction costs, what isyour net gain or loss on this investment if the price of JIG is $43.75 on the option expiration date? (5points)4. According to the Black-Scholes option pricing model, higher levels of volatility increase the value ofoptions. Clearly explain why this is the case in no more than a few sentences. (5 points)5. Your firm factors its accounts receivable immediately at a 1.5% discount. The average collectionperiod on the accounts receivable is 35 days. Assume that all accounts are collected in full. What isthe effective annual interest rate on the factoring arrangement, assuming a 360-day year? (5 points)6. Taylor Toolworks Corp. has annual sales of $48,000,000 (all on credit), maintains an averageinventory level of $11,000,000, and an average accounts receivable balance outstanding of$8,000,000. The company makes all purchases on credit and has always maintained a policy ofpaying on the 25th day. Costs of Goods Sold (COGS) are 60% of sales. The company now plans totake full advantage of trade credit and pay its suppliers on the 30th day. If sales can be maintained atexisting levels but inventory can be lowered by $1,600,000 and accounts receivable can also belowered by $700,000, what will be the net change in the cash cycle assuming a 360-day year? (5points)7. A firm has sales of $825,000. The cost of goods sold equals 70% of sales. The firm has an averageinventory of $40,000. How many days on average does it take the firm to sell its inventory, assuminga 360-day year? (5 points)8. The credit terms offered to your firm by its suppliers are 2/10, net 30 days. Out of convenience, yourfirm is not taking the discounts, but is paying after 21 days, instead of waiting until day 30. What isthe effective annual percentage cost (i.e., the E.A.R.) of your firm?s current practice, assuming a 360day year? How much different would the effective annual percentage cost be if the firm delayed thepayment from 21 days to the 30-day permitted maximum? (5 points)9. The camera you want to buy costs $750 in the United States. If absolute purchasing power parityexists, how much with the identical camera cost in Canada if the exchange rate is C$1 = $0.913312?(5 points)Spring 201410. Assume the $1 can buy either ?102.317 or ?0.59229. If a computer in London costs ?500, what willan identical computer cost in Tokyo if absolute purchasing power parity exists? (5 points)11. If $1 is equivalent to 0.59229 British pounds, while $0.076479 will buy one Mexican peso, how manyMexican pesos must one exchange for 35,000 British pounds? (5 points)12. Your company is considering a capital budgeting project in Australia. The project has an initial costof U.S. $2.19 million and is expected to produce cash inflows (U.S. $) of $1,375,000 a year for 3years. The project will end and have no further cash flows after 3 years. The expected inflation ratein Australia is 3%, while it is only 2% in the U.S. For simplicity, assume that these expected inflationrates equal the risk-free rates. The applicable discount rate (cost of capital) in U.S. terms is 9.5percent. The current spot rate is $1 U.S. = $1.04523 Australian. Show how to completely reconcilethe project?s NPV using both the foreign and home currency approaches. In order to do this, I wouldencourage you to look at the example of this type of reconciliation in the link I have made off of thelesson 10 overview page. (10 points)


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