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Rudik [331]
3 years ago
11

An American-style option with six months to maturity has a strike price of $42. The underlying stock now sells for $50. The call

premium is $14.
a. If the company unexpectedly announces it will pay its first-ever dividend four months from today, you would expect that:

1. the call price would increase.
2. the call price would decrease.
3. the call/put price would not change.
4. the put price would decrease?

b. What is the intrinsic value of the call?
c. What is the time value of the call?
Business
1 answer:
Dmitriy789 [7]3 years ago
4 0

Answer:

(a) The call price would decrease (b) $8 per share (c) $6 per share

Explanation:

Solution:

The Call option is the right to sell a specified security at a specified price on a future date.

(a) The value of call option/ price  will decrease

Since after payment of dividend, the market price of share will decrease

Hence, value of call option will decrease

(b)The Intrinsic Value = Market Price - Strike price

= $50 - $42

= $8 per share

(c)The time Value = Option Premium - Intrinsic Value

= 14-8

= $6 per share

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Answer:

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Explanation:

The computation of the market capitalization is shown below:

= last year dividend × (1 + growth rate) ÷  (cost of capital - growth rate)

= $5.18 billion × ( 1 + 7.9%) ÷ (11.5% - 7.9%)

= $5.58,922 billion ÷ 3.6%

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And, the stock price would be

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= $155.26 ÷ 5.8 billion

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