Question 13 The current price of a stock is $22, and at the end of one year its

Question

Question 13

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?
Answer $2.43
$2.70
$2.99
$3.29
$3.62


.2 points
Question 14

Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 5 months. For $310.25 you can buy a 5-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $310.25 and Johnson's stock price actually rises to $45, what would your pre-tax net profit be?
Answer -$310.25
$1,689.75
$1,774.24
$1,862.95
$1,956.10


.2 points
Question 15

Which of the following statements is CORRECT?
Answer An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.
As the stock

Explanation / Answer

Question 13 The option price is the cost of the stock purchased for the portfolio minus the PV of the payoff: V = 0.5($22) - $8.01 = $2.99 Question 14 The call option will be exercised only if the final price is above the strike price. If the final price is below the strike price, there will simply be a loss equal to the cost of the option. Strike price: $25.00 Final price: $45.00 No. of options: 100 Option cost: $310.25 Profit per share = Final price - Strike price = $45 - $25 or zero: $20.00 Total profit = Profit/option × No. of options - Cost of options = $1,689.75 Question 16 The WACC that should be used in capital budgeting is the firm’s marginal, after-tax cost of capital.

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