Find out the financing choice for each type of investor and


Assignment: Corporate Finance

Problem 1

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1-year call option, S=100, E=87, rF=2% (annual)
1 step per year

How much should the call option worth?

Problem 2

If total return after tax on a certain project is 7.5%, and there are five financing choices available to investors:

(1) 7% interest rate and a 60% LTV ratio;
(2) 7.8% interest rate and a 70% LTV ratio;
(3) 8.5% interest rate and a 80% LTV ratio;
(4) 9.25% interest rate and a 90% LTV ratio;
(5) 9.75% interest rate and a 95% LTV ratio;

Suppose that there are three types of investors (A, B and C) whose tax rates are 15%, 25% and 35%, respectively.

Questions:

(1) Find out the financing choice for each type of investor and the corresponding after-tax return on equity.
(2) Which type of investor has the highest after-tax return on their equity?

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Corporate Finance: Find out the financing choice for each type of investor and
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