You own one call option with an exercise price of $40 on S'more Good stock. The stock is currently selling for $41 a share but is expected to sell for either $37 or $43 a share in one year. The risk-free rate of return is 4.25 percent and the inflation rate is 3.6 percent. What is the current call option price if the option expires one year from now?
Number of options needed = ($43 - $37)/(3 - 0) = 2
$41 = 2C0 + [$37/(1 + 0.0425)]; C0 = $2.75 |
78.
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The assets of Uptown Stores are currently worth $138,000. These assets are expected to be worth either $120,000 or $150,000 one year from now. The company has a pure discount bond outstanding with a $130,000 face value and a maturity date of one year. The risk-free rate is 4.3 percent. What is the value of the equity in this firm?
Number of options needed = ($150,000 - $120,000)/($20,000 - $0) = 1.5
$138,000 = 1.5C0 + ($120,000/(1 + 0.043); C0 = $15,298 |
79.
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Electronic Importers has a pure discount bond with a face value of $25,000 that matures in one year. The risk-free rate of return is 3.8 percent. The assets of the business are expected to be worth either $23,000 or $35,000 in one year. Currently, these assets are worth $27,500. What is the current value of the bond?
Number of options needed = ($35,000 - $23,000)/($10,000 - $0) = 1.2
$27,500 = 1.2C0 + ($23,000/(1 + 0.038)); C0 = $4,451.67 Value of debt = $27,500 - $4,451.67 = $23,048 |
80.
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The Glass House has total assets currently valued at $17,300. These assets are expected to increase in value to either $18,000 or $21,000 by next year. The company has a pure discount bond outstanding with a face value of $20,000. This bond matures in one year. Currently, U.S. Treasury bills are yielding 5.4 percent. What is the value of the equity in this firm?
Number of options needed = ($21,000 - $18,000)/($1,000 - $0) = 3
$17,300 = 3C0 + ($18,000/(1 + 0.054)); C0 = $74.07 |
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