• +44-190-022-0819 +44-190-022-0819
  • +1-248-268-9041 +1-248-268-9041
  • +61288800241 +61288800241


Search your solution from list of 1000+ questions


Product code: Accounts-AW410




Answer 2 of the following questions.

1. The company BETARIX is an investment company (actually like a mutual

fund) that has the following balance sheet:



Assets Liabilities

• Bonds for 100.000 EUR (market value) a 100% equity financed © 1000 units of stocks of Valuax Ltd (500 units of stocks issued)


- The bonds owned by Betarix Ltd are government bonds and their beta is for simplicity assumed to be zero. The duration of the bond is 4 years.


- Betarix also owns stocks of Valuax. Valuax is a company with an expected dividend of 10 EUR the next year. The expected growth rate of its dividends is 2% annually from the next year onwards. The markets risk-adjusted rate of return requirement for the Valuax stock is 8% p.a. The Valuax stock has a beta of 0.8.


1.) Compute the market value of one stock of Betarix. Also: what would its beta be?

(Hint: For the price of the Valuax stock, use the Gordon formula. For beta, use the rule on page 20, only this turn for the other side of the balance sheet.)


2.) Assume that interest rates in the economy go up by 1%. Prior to this, the bond yield was 4% and the rate-of-return requirement for the Valuax stock 8%. Now each of these goes up by 1%. Compute approximately what the percentage change in the market value of Betarix would be.


3.) Assume now that Betarix would instead be financed (on the liabilities side) both by equity and debt (50% each). Explain verbally how that would change your expectations concerning the expected return and risk of its stock?


2. Try to find the options that may be hidden in the following real-life situations A and B and identify whether you are the owner or writer of a call (C) or put (P) option. Describe also, if information given, whether the option is in-the-money or out-of-the-money, and how the existence of the option affects what you are willing to pay for the instrument / your willingness to accept the deal as compared to a situation where there would not be an

option imbedded.


Answer also question C.

© A. You have one year ago borrowed money from a bank at a fixed interest rate of 6%. The remaining borrowing time is 9 years. The loan is paid back annually (in equally large amortizations) together with the annual interest payment. However, if you want, you can repay the loan sooner (amortize it faster) than in 10 years at no additional cost. The current long-term (« 9 y.) bond yield is 5.2%.


 B. You are an owner of a convertible bond that can, within 2 years, be converted to 5 stocks in Nokia. The current market value of the bond is EUR 1000, and the price of one Nokia stock is EUR 21,70. ® C. Assume that you are the owner of a call option on the Nokia stock.


Assume further that Nokia has chosen one of the two alternative network standards for the future, and is the only one producing this one. Many believe that both networks could co-exist for a reasonable time period, and Nokia is assumed to get a 50% market share worldwide. Suppose that suddenly a group of central country leaders decide that the network question will be solved once and for ail, and only one standard will be accepted worldwide. Nokia's standard has a 50% chance of being selected as the chosen one. How would this affect the price of your Nokia call option?


Download Questions

The sudden emergence of new standard will increase the risks for Nokia which in turn decreases the price of nokia stocks which means that the call options will become more out of money so it will decrease the price of the call options.

Related Questions in (Accounting)


Solution: The Journal of Helene Berr and Rue Ordener, Rue Labat 2 evidences that prove the difficulty and destructiveness that the people had to face in those four years. As mentioned by Berr (2009, p.23), in h ...


Solution: Employee communication highlights the sharing of ideas and information. In this competitive business world, information exchange is essential among employees to develop team performance effectively. m ...


Solution: As per Section 1 of the Thirteenth year plan describes about China’s two key objectives that will be accomplished if the National People’s Congress or the standing committee of this party passes t ...


Solution: (Feldman 2005) reference information extraction to be one of the weightiest pre-processing method that escalates the text mining potential significantly. Pre-processing is an essential part in informa ...


Solution: The pro forma income statement represents a trending statement that includes the probable net income value for the company considering the current growth and decline rates valid throughout the period ...


Solution: Mode is defined as the value which occurs more frequently in the data set. The mode for non-business is 82 while for business is only 59. P value can be calculated from z table . As per z table p valu ...


Solution: ABC assumes that there are different activities involved in different processes that cause costs andthe product, services, and customers are reasons for those activities. The UK customer segment is br ...


Solution: Residual earnings valuation method is used to calculate the intrinsic value of the stock based on the expected residual income of the company in the coming years. The residual income is discounted bac ...