Exhibit 13.3 Use the Information Below for the Following Problem(S)

question 19

Multiple Choice

Exhibit 13.3
Use the Information Below for the Following Problem(S)
The Home Appliance Industry had free cash flow to equity (FCFE) of $87 for the most recent year ending reported yesterday. The industry anticipates a growth rate of 8% for the next three years due to favorable economic conditions. However, the growth rate is expected to decline to 4% after three years and remain at that level indefinitely. The required rate of return is 12% for this industry.
-Refer to Exhibit 13.3.Calculate the intrinsic value of the Home Appliance Industry today.

• A) $605.03
• B) $1,014.09
• C) $1,256.88
• D) $1,424.73
• E) $1,729.76

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Definitions:

Protective Put

Purchase of an asset combined with a put option on that asset to guarantee proceeds at least equal to the put’s exercise price.

Underlying Asset

The financial asset upon which a derivative instrument, such as a futures or options contract, is based.

Convertible Bond

A bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm. The conversion ratio specifies the number of shares. The conversion price is the current value of the shares for which the bond may be exchanged. The conversion premium is the excess of the bond’s value over the conversion value.

Straight-Bond Value

The value of a bond calculated without considering any embedded options, based purely on its coupon payments and maturity value.