Sales revenue is amount generated by the firm through sale of goods or services. It is used to measure the size of the business. Sales revenue = [ Net income + Taxes + Operating expenses + Depreciation ] Net cashflow refers to the change in the firm’s cash balance as indicated in the cash flow statement. It is commonly used to evaluate the cash flow balances in the firm. The following is the general formula used to calculate the net cash flow. Net cashflow = Net income + Depreciation HTW’s net income was $240,000; depreciation was $100,000; and operating expenses were $500,000 before including depreciation. The tax rate is 40%.

Question

In the derivation of the option pricing formula, we required that a delta-hedged position earn the risk-free rate of return. A different approach to pricing an option is to impose the condition that the actual expected return on the option must equal the equilibrium expected return. Suppose the risk premium on the stock is 0.03, the price of the underlying stock is 111, the call option price is 4.63, and the delta of the call option is 0.4. Determine the risk premium on the option.

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Chapter 2, Problem 6PROB

Summary Introduction

Sales revenue is amount generated by the firm through sale of goods or services. It is used to measure the size of the business.

Sales revenue=[Net income+Taxes+Operating expenses+Depreciation]

Net cashflow refers to the change in the firm’s cash balance as indicated in the cash flow statement. It is commonly used to evaluate the cash flow balances in the firm. The following is the general formula used to calculate the net cash flow.

Net cashflow=Net income+Depreciation

HTW’s net income was $240,000; depreciation was $100,000; and operating expenses were $500,000 before including depreciation. The tax rate is 40%.

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In the derivation of the option pricing formula, we required that a delta-hedged position earn the risk-free rate of return. A different approach to pricing an option is to impose the condition that the actual expected return on the option must equal the equilibrium expected return. Suppose the risk premium on the stock is 0.03, the price of the underlying stock is 111, the call option price is 4.63, and the delta of the call option is 0.4. Determine the risk premium on the option.

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