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Homework answers / question archive / 1)Monroe, Inc
1)Monroe, Inc., is evaluating a project. The company uses a 13.8 percent discount rate for this project. Cost and cash flows are shown in the table. What is the NPV of the project? Year Project 0 ($11,368,000) 1 $ 2,112,589 2 $ 3,787,552 3 $ 3,175,650 4 $ 4,115,899 5 $ 4,556,424 Round to two decimal places.
2) Five years ago, Atlas Industries sold a bond with a par value of $1,000, with 30 years to maturity, and with a coupon rate of 6.0%, paid annually. Today, with 25 years remaining to maturity, the yield to maturity is 8.0%. What is the price of this bond?
3)You are given a table of 6-month call option prices for ZOO Animals Ltd. (ZOO). ZOO is currently trading at $40. The 6 month risk free rate is 5.00. Call Premium Strike Price 40 43 2.86 1.54 0.75 46
Create a payoff-profit table for a 6-month Bull Call Spread on ZOO stock of width 3 where the lower strike call option is “OUT of the money”. For the table, assume spot prices from 38 to 48 in increments of 1.
b) What is the maximum risk for this position?
c) What is the breakeven spot price in 6 months?
d) What is the maximum profit for this position?
1)You need to use a Financial calculator to solve this problem. You can download it.
Press CF Button, CFo = -11,368,000 (This is the Initial Outflow)
Press Down arrow key, CO1 = 2,112,589 (Inflow from the project after end of year 1)
Like this fill CO2=3,787,552, CO3= 3,175,650 and CO4=4,115,899 and CO5= 4,556,424
Press NPV Button, I=13.8 (The discount rate is 13.8%)
Press Down arrow key, press CPT, NPV = 409,301.98
The NPV of the project is $409,301.98
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3)
| BULL CALL SPREAD: | |||||||||
| Cash flow | |||||||||
| 1 | BUY CALL STRIKE @ 43 | -1.54 | |||||||
| 2 | SELL CALL STRIKE @46 | 0.75 | |||||||
| Net Cash Flow | -0.79 | ||||||||
| Payoff for Buy Call at Strike 43 | |||||||||
| Assume Price at expiration =S | |||||||||
| Payoff=Max.((S-43),0) | |||||||||
| Payoff for SELL Call at Strike 46 | |||||||||
| Assume Price at expiration =S | |||||||||
| Payoff=Min.((46-S),0) | |||||||||
| PAYOFF-PROFIT TABLE | |||||||||
| S | A | B | C=A+B | D=C-0.79 | |||||
| Price at expiration | Payoff Buy Call@43 | Payoff Sell Call@46 | Payoff for Bull Spread | Net Profit for Bull Spread | |||||
| 38 | 0 | 0 | 0.00 | -0.79 | |||||
| 39 | 0 | 0 | 0.00 | -0.79 | |||||
| 40 | 0 | 0 | 0.00 | -0.79 | |||||
| 41 | 0 | 0 | 0.00 | -0.79 | |||||
| 42 | 0 | 0 | 0.00 | -0.79 | |||||
| 43 | 0 | 0 | 0.00 | -0.79 | |||||
| 43.79 | 0.79 | 0 | 0.79 | 0.00 | |||||
| 44 | 1 | 0 | 1.00 | 0.21 | |||||
| 45 | 2 | 0 | 2.00 | 1.21 | |||||
| 46 | 3 | 0 | 3.00 | 2.21 | |||||
| 47 | 4 | -1 | 3.00 | 2.21 | |||||
| 48 | 5 | -2 | 3.00 | 2.21 | |||||
| b) | Maximum risk for this position | 0.79 | |||||||
| c) | Break Even Spot Price | 43.79 | |||||||
| d) | Maximum Profit for this position | 2.21 |
