1, Your broker recommends that you purchase ABC Inc. at $60. The stock pays a $2

Question

1, Your broker recommends that you purchase ABC Inc. at $60. The stock pays a $2.40 dividend which (like its per share earnings) is expected to grow annually at 8 percent. If you want to earn 12% on your funds, what is the valuation of the stock?

Multiple choice (Only 1 answer is right)

2, The Writer of a Naked call option wants____

a, the prices of the stock and the call to rise,

b, the prices of the stock and the call to fall,

c, the prices of the stock to fall and the call to rise,

d, the prices of the stock to rise and the call to remain stable.

3, If the investor sells a stock Short, that individual reduces the risk of loss by_____

a, buying a put,

b, buying a call,

c, entering a limit order to sell the stock if its price declines,

d, increasing the collateral with broker

4, If the investor anticipates that the price of stock will be Stable, he or she may _____

a, sell a staddle

b, buy a straddle

c, buy a call,

d, buy a put

5, If the investor anticipates that the price of stock will fluctuate, this individual may___

a, sell a call and sell a put

b, buy a call and buy a put

c, buy a call and sell a put,

d, sell a call and buy a put

The questions originated from the Textbook- Introduction to Investments (10th edition) from the author: Herbert B. Mayo.

Pls show the work of calculation also. Thank you!

Explanation / Answer

if we want to earn 12%

valuation = D1/(r-g) = 2.4*(1.08)/(.12-.08) = $64.8

2. b)the prices of the stock and the call to fall

3. b) buying a call

4. a) sell a stadle

5) c)the prices of the stock and the call to fall

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