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Akimi4 [234]
3 years ago
14

A stock is currently priced at $52.50 a share. One year from now, the stock price is expected to be either $54 or $60 a share. T

he risk-free rate of return is 4 percent. What is the value of a 1-year call option with an exercise price of $55
Business
1 answer:
oee [108]3 years ago
7 0

Answer:

Value of 1-Year option=$0.48

Explanation:

First, we have to calculate the present value of share being priced at $54 after one year,which shall be calculated as follow:

Present value of share=54(1+4%)^-1

                                     =$51.92

Now we have to calculate the number of options which will be required to exercise for one share:

Number of options=(60-54)/(5-0)=1.2

Finally, we have to calculate the value of 1-year call options which shall be calculated as follow:

Current price of share=Number of options required for one share*Value of 1-year option+Present value of share

52.50=1.2*value of 1-Year option+51.92

1.2*value of 1-Year option=0.58

Value of 1-Year option=$0.48

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3 years ago
The owner of a bicycle repair shop forecasts revenues of $160,000 a year. Variable costs will be $50,000, and rental costs for t
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Answer and Explanation:

Revenue                              $160,000

Rental Costs                      $30,000

Variable Costs                      $50,000

Depreciation                      $10,000

Profit before tax              $70,000

Tax(35%)                              $24,500

Net Income                      $45,500

Operating cash flow

a) Dollars in minus dollars out

Revenue ? rental costs ? variable costs ? taxes = $160000 -$30000-$50000-$24,500 = $55,500

b) Adjusted accounting profits

Operating cash flow = Net income + depreciation = $45,500 + $10,000 = $55,500

c) Add back depreciation tax shield

Operating cash flow = [(Revenue ? rental costs ? variable costs) × (1 ? 0.35)] + (depreciation × 0.35)]

= ($160,000-$30000-$50,000)*0.65 + $10,000*0.35 = $55,500

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4 0
3 years ago
For which of the following random variables would the use of a Normal distribution as a model be a clear error?
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Answer:

A. The number of houses that an individual owns

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The use of normal distribution in option A would produce an error. That is the number of houses individuals own.

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Option a is going to be skewed positively. Using Normal distribution would give us an error.

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2 years ago
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An increase in the price of coffee beans can be expected to increase the demand for pie.

So, in the market if the price of coffee beans increases, quantity demanded for coffee will decrease. As, the coffee in turn is a complement to pie the consumers using coffee will now shift themselves to pie, unless the price decreases for coffee. Thus, the demand for pie is expected to increase now.

Several events could lead to such a change, an increase in  population , an increase in incomes, or an increase in the price likely to increase the quantity of coffee demanded at each price.

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To learn more about the Law of Demand here:

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