The shares of DCB Bank are currently valued at $27 and they have a volatility of 28% pa. The risk free rate is 6% pa. You many find this table showing the values of the standard normal cumulative distribution function useful. a) Calculate the price of a European call option on these shares, with strike price $28 and a term to expiration of 9 years. Give your answer in dollars and cents to the nearest cent. HINT: This question does not interpolate values from the standard normal cumulative distribution. For this particular question, when looking up z values from the distribution, first round your calculated value of z to two decimal places and then use that rounded z value to find F(z). Price of call option = $ DCB bank have just announced that a dividend of $0.72 will be paid in 1 years time and an additional dividend of $1.28 will be paid in 8 years time. b) Taking this new information into account, calculate the adjusted price of the call option. Give your answer in dollars and cents to the nearest cent and assume that the time between the ex-dividend date and actual payment of the dividend has a negligible effect. Adjusted price of call option = $
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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