You are considering entering the shoe business. You believe that you havea narrow window for entering this market. Because of Christmas demand,the time is right today, and you believe that exactly a year from now wouldalso be a good opportunity. Other than these two windows, you do notthink another opportunity will exist to break into this business. It will costyou $35 million to enter the market. Because other shoe manufacturersexist and are public companies, you can construct a perfectly comparablecompany. Hence, you want to use the Black-Scholes formula to decidewhen and if you should enter the shoe business. Your analysis implies thatthe current value of your shoe company would be $40 million, and that thevolatility is 25% per year. Of the $40 million current value, $6 million iscoming from the free cash flows expected in the first year. The risk-freerate is 4%. What is the value of the investment opportunity if you chooseto wait? (Hint: think of the investment as a call option)$1.03 million$5.72 million$3.54 million$10.29 million

Calculate the stock price after adjusting for dividend as follows:

Answered: You are considering entering the shoe…

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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