1) Walt Disney Co. stock is currently trading at $79.99 per share. You expect dividends of $2.86 per share one year from now and you expect that the price of Walt Disney stock will be $88.50 per share in one year.
a. What is the expected rate of capital gain, dividend yield, and one-year holding period return on Walt Disney stock?
b. Walt Disney’s beta is 1.31. The risk-free rate is 0.20% and the expected return on the market portfolio is 12%. What is the required rate of return on Walt Disney stock? What is Walt Disney’s alpha? Is Walt Disney stock over- or under-valued
c. What is the intrinsic value of Walt Disney stock? Is Walt Disney stock over- or undervalued?
d. Walt Disney’s dividend at the end of the year is expected to be $2.86 per share and is expected to grow at a constant rate of 8%. Using the required return calculated in part b., what is the intrinsic value of Walt Disney stock according to the constant growth dividend discount model? Is Walt Disney stock over- or undervalued?
2) On April 21, 2014, United States Steel Corporation stock was trading at $26.50 per share, an increase of 63% from the previous year. You believe that global economic activity will strengthen and that United States Steel stock will continue to rise over the next six months from the current price of $26.50 per share. You have $53,000 to invest and are considering the three following strategies:
i. Purchase 2000 shares of United States Steel stock.
ii. Purchase 265 call option contracts (each contract is for 100 shares of the underlying stock) which expire in 6 months with a strike price of $28. The price of each contract is $2.00 (per share).
iii. Purchase 100 call option contracts and invest your remaining funds in a money market account paying 0.75% over 6 months (1.5% annually).
What is your 6 month rate of return for each strategy for the following stock prices 6 months from now: $23 $26.50 $28 $30 $32
Which strategy has the highest potential gains? Which strategy has the highest potential losses?
a. Demonstrate that an at-the-money call option on a given stock must cost more than an at-the-money put option on the same stock with the same expiration date (no dividends are paid on the stock).
b. The price of a share of IBM stock is $192.27. Consider the following prices on IBM stock options that expire in 6 months with a strike price of $200:
What is price of a t-bill that matures in 6 months with a face value equal to $200?