Sell What You Need

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a) (5.00×0.5)/(0.1-0.08)=125 Equilibrium Price = $125

(b) i. The required rate of return is underestimated.

ii. The future growth is overestimated.

(c) (5.00×0.5)/(0.1-g)=50

2.5 = 50×(0.1-g)

2.5=5-50g

50g=2.5

g=0.05 Growth rate = 5%

2.

(a) Current price = $25.12

P/E = 10.8

(b) Plowback Ratio = 1- Dividnents/EPS= 1-0.64/2.33=0.725 72.5%

(c) Growth rate in 5 years = 9.87%

(d) β=1.01

r=4%+1.01× 6%= 10.06%

(e) P/E= ((1-b)(1+g))/(R-g)= ((1-0.725)(1+0.0987))/(0.1006-0.0987)=0.302143/0.0019= 159

(f) 10.8= (1-0.725)(1+g)/(0.1006-g)=0.275(1+g)/(0.1006-g)

10.8(0.1006-g)= 0.275(1+g)

1.086-10.8g=0.275+0.275g

11.075g=0.811

g=0.07323

Growth Rate = 7.323%

3.

(a) $18

(b) Buy in the South Pole and sell in the North Pole

(c) [$16, 20]

4.

(a) Regardless of the weather, I get the profit of $7

(b) If 1-year zero-coupon bond has a face value of $100, the price of the bond must be $93.

(c)

t=0 Buy 1-year ZCB $-90

Short 1 RAIN +23

Short 1 SUN +70

Net Profit $ 3

t=1 Redeem 1-year ZCB $ +100

Pay back SUN/RAIN - 100

Net Profit $ 0

(d) No. Then, the total transaction cost will be $4.00. The profit from the arbitrage is $3. Therefore, there will be a net loss of $1.