Essay About American Put Option And Return Policy

Accounting
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Ans. 3
Value of a firm without debt = 1.2 million / 11%
Cash flow
1,200,000
Value of a firm without debt =
10,909,091
Ratio
2,000,000
17.23%
Equity
9,609,091
82.77%
Value of a firm with debt = 10,909,091 + ( 2,000,000 * 0.35 )
Value of a firm with debt =
11,609,091
New Cost of Equity Capital =
11.54%
New WACC = 11.54% * 0.8277 + (7%*0.065)*0.1723
New WACC =
10.34%
If the interest expense is not tax deductible the
value of the firm is same as calculated in part a.
Ratio
2,000,000
18.33%
Equity
8,909,091
81.67%
Value of a firm with debt = 10,909,091 + ( 2,000,000 * 0.35 )
Value of a firm with debt =
10,909,091
New Cost of Equity Capital =
11.90%
New WACC = 11.54% * 0.8277 + (7%*0.065)*0.1723
New WACC =
11.00%
Ans. 4
“if you have changed your mind and are not entirely satisfied with your purchase, simply return
the unused item within 45 days for an exchange or refund”. ——–IKEAs Return Policy
IKEAs return policy represents an American put option written by IKEA because American
option can be exercised any time prior to expiration and here IKASs return policy also
says that the customer can return the unused item any time within the expiry days which is45.
And put option gives holder the right to sell underlying asset and here IKASs policy also
gives the holder ( a customer) to sell (return) the