# Imagine that you are holding 5,000 shares of stock, currently selling at \$40 per share. You are ready to sell the shares but would prefer to put off the sale until next year for tax reasons. If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January call options with a strike of \$45 are selling at \$2, and January puts with a strike price of \$35 are selling at \$3. 1. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at: (a) \$30 (b) \$40 (c) \$50 2. Compare these proceeds to what you would realize if you simply continued to hold the shares.

1. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at:

(a) \$30  ⇒ \$170,000

(b) \$40   ⇒ \$195,000

(c) \$50  ⇒ \$220,000

call strike price \$45

put strike price \$35

you pay \$2 - \$3 = -\$1

stock price

\$30              \$40               \$50

stock value                           \$30              \$40               \$50

put value                                \$5                 -                     -

call value                                 -                   -                   -\$5

net stock value                     \$34              \$39               \$44

total # of stocks                 5,000          5,000           5,000

portfolio's value             \$170,000     \$195,000    \$220,000

2. Compare these proceeds to what you would realize if you simply continued to hold the shares.

if you hold the stocks:

(a) \$30  ⇒ \$150,000 - \$170,000 = -\$20,000 (you gain by using a collar)

(b) \$40   ⇒ \$200,000 - \$195,000 = \$5,000 (you lose by using a collar)

(c) \$50  ⇒ \$250,000 - \$220,000 = \$30,000 (you lose by using a collar)

## Related Questions

Peak Performance Sporting Goods Company continues to perform well. Company executives credit this to the strong partnerships it enjoys with category killer and large discount chains. Last week Peak Performance reported basic EPS [earnings per share] = \$.80/share. If the firm has 4,000,000 shares outstanding, net income after taxes for the same period =

\$3,200,000

Explanation:

The net income after taxes (NIAT) is determined as the product of the basic earnings per share (EPS) by the number of shares outstanding.

Since Peak Performance Sporting Goods has an EPS of \$0.80 per share and 4,000,000 shares outstanding, their net income after taxes, for this period is:

Net income after taxes for the same period = \$3,200,000.

Describe some products whose adoption rates have been affected by complexity, compatibility, relative advantage, observability, and/or trial-ability.

Complexity ⇒ electric cars are affected by complexity. Chargers for electric cars are not easily found in small cities, which makes it difficult for people living on small towns to own an electric car.

Compatibility ⇒ when Apple launched the iPad, most of its consumers already owned an iPhone which made their use much more simple, natural and compatible.

Relative advantage ⇒ hybrid cars are much more fuel efficient than regular gas cars and that is an advantage when consumers are comparing the costs of owning and using a car.

Trialability ⇒ free lotion samples given away in supermarkets are an example of trialability. Potential consumers can use try them and if they like them they will purchase them. Another example is the one month free trials for online services.

Observability ⇒ when Apple launched the first iPhone, the Blackberrry phone was the most popular. But as people were able to observe the advantages of the iPhone, they quickly changed their phones.

Young Pharmaceuticals is considering a drug project that costs \$2.42 million today and is expected to generate end-of-year annual cash flows of \$211,000 forever. At what discount rate would the company be indifferent between accepting or rejecting the project?

At 8.72% the company would be indifferent between accepting or rejecting the project

Explanation:

To be indifferent to accepting or rejecting the project, the initial cost of the project should equal the present value of all expected cash inflow to the project i.e. the Break-even point which is the point at which revenue = cost, thereby generating zero profit.

From the question, Young Pharmaceuticals is investing \$2.42 million and expects an annual year end cash flow of \$211,000 forever. We therefore apply the annuity to perpetuity formula

PV of perpetuity = Periodic cashflow/interest rate

cross multiply and make Interest the subject of the formular

= Interest = Periodic cashflow/PV of perpetuity

i = 211000/2420000

= 0.0872

= 8.72%

I sell bottled water that costs me \$1 to produce. I mark each bottle up by \$2. What is my margin on price

50%

Explanation:

To calculate themargin on price, you have to find the difference between the price of the good and the cost to produce it and the result is divided by the price of the product:

Margin=(2-1)/2

Margin=1/2

Margin=0.5 → 50%

According to this, your margin on price is 50%.

The margin on price for the bottled water in this scenario is \$2, which is the marked up price subtracted from the cost to produce. The margin on price can be calculated by subtracting the cost to produce the bottled water from the selling price. In this case, the selling price is \$2 more than the production cost of \$1. So the margin on price is \$2.

### Explanation:

If you sell bottled water that costs \$1 to produce and you mark each bottle up by \$2, your margin on price is \$2. This is because the margin on price is the difference between the selling price and the cost of the product. The margin on price can be calculated by subtracting the cost to produce the bottled water from the selling price. In this case, the selling price is \$2 more than the production cost of \$1. So the margin on price is \$2. So if you're selling your bottled water for \$3 (\$1 cost + \$2 markup), and it costs you \$1 to produce, then your margin on price is \$3 - \$1 = \$2.

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Ultra Day Spa provided \$94,850 of services during Year 1. All customers paid for the services with credit cards. Ultra submitted the credit card receipts to the credit card company immediately. The credit card company paid Ultra cash in the amount of face value less a 1 percent service charge. Required a. Show the credit card sales (Event 1) and the subsequent collection of accounts receivable (Event 2) in a horizontal statements model like the one shown next. In the Statement of Cash Flows column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). (Enter any decreases to account balances with a minus sign. Not all cells in the "Statement of Cash Flows" column may require an input - leave cells blank if there is no corresponding input needed.)

The presentation is shown below:

As per the data given in the question,

Assets =  Liabilities   +   Equity    Revenue -  Expenditure = Net income Cash flow

Cash + Acc. Rev.

NA      \$94,850  NA       \$94,850 \$94,850        NA                \$94,850      NA

\$93,901.5 -\$94,850 NA    -\$948.5   NA           -\$948.5          -\$948.5   \$93,901.5

We simply present the transactions on the financial statements

Given the following data, calculate the Total Variable Cost variance. Planning Budget Actual Results Revenue \$73,000 \$75,000 Variable costs \$23,000 \$20,000 Contribution margin \$50,000 \$55,000 Fixed costs \$15,000 \$10,000 Profit before taxes \$35,000 \$45,000 a. \$3,000 Favorable b. \$3,000 Unfavorable c. \$5,000 Favorable d. \$5,000 Unfavorable e. \$2,000 Unfavorable f. \$2,000 Favorable

a. \$3,000 Favorable

Explanation:

Variable cost variance is the difference between the budgeted variable cost and actual variable cost for a period.

Use following formula to claculate the variable cost variance

Variable cost variance = Budgeted Variable cost - Actual variable cost

Placing values in the formula

Variable cost variance = Budgeted Variable cost - Actual variable cost

Variable cost variance = \$23,000 - \$20,000

Variable cost variance = \$3,000

As the actual cost is less than the budgeted cost, so the \$3,000 is saved in respect of variable cost.