# Finc 5880 week 5 mid-term examination 36096

Question
Question 1. (10 points) The exercise price on one of ORNE Corporation’s call options is \$35 and the
price of the underlying stock is \$34. The option will expire in 55 days. The option is currently selling
for \$0.25.
a. Calculate the option’s exercise value?

#### How many pages is this assigment?

b. Calculate the value of the premium over and above the exercise value? What does
this value represent?

c. Is this an out-of-the money option, at-the-money, or in-the-money? Why?

d. What will happen to the value of the option if the underlying stock price changes to \$34.50?
Why?

e. If this were a put option, would it have a greater or lesser value than the call option? Why?

Question 2. (15 points) The Reuth Company is evaluating the proposed acquisition of a new machine. The

machine’s base price is \$600,000 plus shipping costs of \$20,000. The machine falls into the MACRS 3-year

class (use factors .33, .45, .15, .07), and it would be sold after 5 years for \$10,000. The machine would require

an increase in net working capital of \$25,000. The machine would have no effect on revenues, but it is

expected to save the firm \$200,000 per year for 5 years in before-tax operating costs. . Campbell’s marginal tax

rate is 35 percent and its cost of capital is 13 percent.
a. Calculate the cash outflow at time zero.

b. Calculate the net operating cash flows for Years 1 through 5

c. Calculate the terminal year cash flow.

d. Calculate NPV. Should the machinery be purchased? Why or why not?

Question 3. (15 points) A company estimates the following free cash flows (FCFs) during the next 3 years, after which FCF
is expected to grow at a constant 6% rate. The company’s cost of capital is 12%. the company has \$3 million in marketable
securities, \$50 million in debt, and 10 million shares of stock.

Year
Free cash flow (\$ millions)

1
-5

2
15

3
30

a. Calculate the company’s horizon, value?

b. Calculate the company’s current value of operations.

c. Calculate the value of one share of share?

d. The stock is selling for \$32.50. Is it appropriately priced in the market? Explain.

Page 3 of 4

05/18/2013

Mid-Term Examination
FINC 5880
Week 5
Question 6. (15 points) Epoty Corporation is evaluating whether to lease or
purchase needed equipment at a cost of \$10,000. If the equipment is leased, the
lease would not have to be capitalized. The company’s balance sheet prior to the
acquisition of the equipment is as follows.
a. Calculate the company’s current debt ratio?
Equipment cost
Current assets
Net Fixed assets
Total assets

\$10,000
Current Balance Sheet
\$50,000
Debt
40,000
Equity
\$90,000
Total claims

\$35,000
55,000
\$90,000

b. Calculate the company’s debt ratio if it purchases the equipment.

c. Calculate the company’s debt ratio if it leases the equipment?

d.

Will the company’s ROA and ROE ratios be affected by its decision to lease
or purchase? Why or why not?

e. What factors should the company consider in coming to its decision other
than net advantage to leasing? Why?

## Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
\$26
The price is based on these factors:
Number of pages
Urgency
Basic features
• Free title page and bibliography
• Unlimited revisions
• Plagiarism-free guarantee
• Money-back guarantee
On-demand options
• Writer’s samples
• Part-by-part delivery
• Overnight delivery
• Copies of used sources
Paper format
• 275 words per page
• 12 pt Arial/Times New Roman
• Double line spacing
• Any citation style (APA, MLA, Chicago/Turabian, Harvard)

# Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

### Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

### Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

### Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.