[Q: 21-6336383] Extended Binomial Model. A gas company has an opportunity to sell up to 5.5 million gallons ofgasoline in six months at a price of $3.85 per gallon. The price is currently $3.60 per gallon but the price is highlyvolatile (o=64%). The nominal risk-free rate is 8%.The company is evaluating this opportunity using the binomial model, assuming a price change every threemonths (n = 4). The company has already determined that the up-state factor is 1.3771, the down-state factor is0.7261, and the risk-neutral probability of entering the up-state is 45.15%. Calculate the per-gallon value of thisopportunity today by completing this company's analysis. Round the possible six-month gas prices to two decimalplaces and use the rounded values in your analysis.The per-gallon value of this opportunity today is $ 0.5839. (Enter your answer rounded to four decimal places).

As per the question, we are asked to evaluate the value of an opportunity for a gas company to sell…

Answered: The per-gallon value of this…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A company has a project with initial investment is $40,000. It will generate $15,000 annually for the next four years. Assume that this company and its project have a beta of 2.0, the risk-free rate of return (ie., Rm) is 2%, and the market return (i.e., Rm) is 796?. How much is the NPV of this project? [Hint: As discussed, the CAMP model can be used to estimate discount rate (r) in the NPV analysis equation). A) 5,555 B) 3,333 4,444 6,666
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