
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 21, Problem 7P
Eagletron’s current stock price is $10. Suppose that over the current year, the stock price will either increase by 100% or decrease by 50%. Also, the risk-free rate is 25% (EAR).
- a. What is the value today of a one-year at-the-money European put option on Eagletron stock?
- b. What is the value today of a one-year European put option on Eagletron stock with a strike price of $20?
- c. Suppose the put options in parts a and b could either be exercised immediately, or in one year. What would their values be in this case?
Expert Solution & Answer

Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
$1.35 Million for the below question is incorrect, Machine A is $1.81 and Machine B is $0.46 Million.
The Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $8 million but realizes after-tax inflows of $4.5 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $17 million and realizes after-tax inflows of $4 million per year for 8 years, after which it must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. The cost of capital is 13%. Using the replacement chain approach to project analysis, by how much would the value of the company increase if it accepted the better machine? Round your answer to two decimal places.
1.) $1.35 million
Buggies-Are-Us
Steady Freddie, Inc
Gang Buster Group
g = 0
g =
55%
Year 1
$3.51
(i.e., dividends
are expected
to remain at
$3.053.05/share)
(for the
foreseeable
future)
Year 2
$4.04
Year 3
$4.63
Year 4
$5.36
Year 5
$6.15
Year 6 and beyond: g =
55%
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years.
Calculate the two projects' NPVs, assuming a cost of capital of 12%. Do not round intermediate calculations. Round your answers to the nearest cent.
Calculate the two projects' PIs, assuming a cost of capital of 12%. Do not round intermediate calculations. Round your answers to three decimal places.
Project L is not 1.07
Chapter 21 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 21.1 - What is the key assumption of the binomial option...Ch. 21.1 - Why dont we need to know the probabilities of the...Ch. 21.1 - Prob. 3CCCh. 21.2 - What are the inputs of the Black-Scholes option...Ch. 21.2 - What is the implied volatility of a stock?Ch. 21.2 - How does the delta of a call option change as the...Ch. 21.3 - What are risk-neutral probabilities? How can they...Ch. 21.3 - Does the binominal model or Black-Scholes model...Ch. 21.4 - Is the beta of a call greater or smaller than the...Ch. 21.4 - What is the leverage ratio of a call?
Ch. 21.5 - Prob. 1CCCh. 21.5 - The fact that equity is a call option on the firms...Ch. 21 - The current price of Estelle Corporation stock is...Ch. 21 - Using the information in Problem 1, use the...Ch. 21 - Suppose the option in Example 21.11 actually sold...Ch. 21 - Eagletrons current stock price is 10. Suppose that...Ch. 21 - What is the highest possible value for the delta...Ch. 21 - Hema Corp. is an all equity firm with a current...Ch. 21 - Consider the setting of Problem 9. Suppose that in...Ch. 21 - Roslin Robotics stock has a volatility of 30% and...Ch. 21 - Rebecca is interested in purchasing a European...Ch. 21 - Using the data in Table 21.1, compare the price on...Ch. 21 - Consider again the at-the-money call option on...Ch. 21 - Harbin Manufacturing has 10 million shares...Ch. 21 - Using the information on Harbin Manufacturing in...Ch. 21 - Using the information in Problem 1, calculate the...Ch. 21 - Prob. 23PCh. 21 - Prob. 24PCh. 21 - Calculate the beta of the January 2010 9 call...Ch. 21 - Consider the March 2010 5 put option on JetBlue...
Additional Business Textbook Solutions
Find more solutions based on key concepts
Preparing Financial Statements from a Trial Balance The following accounts are taken from Equilibrium Riding, I...
Fundamentals of Financial Accounting
The cost of capital. Introduction: The cost of capital is the opportunity cost involved in making a specific in...
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
How would the decision to dispose of a segment of operations using a split-off rather than a spin-off impact th...
Advanced Financial Accounting
15-18 Societal moral issue: Although enforcement of worker safety in Bangladesh is clearly lax, government offi...
Fundamentals of Management (10th Edition)
(Future and present value using a calculator) In 2016 Bill Gates was worth about $82 billion. Let’s see what Bi...
Foundations Of Finance
E5-18 Using accounting vocabulary
Learning Objectives 1, 2,3
Match the accounting terms with the corresponding ...
Horngren's Accounting (12th Edition)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Wilbur and Orville are brothers. They're both serious investors, but they have different approaches to valuing stocks. Wilbur, the older brother, likes to use the dividend valuation model. Orville prefers the free cash flow to equity valuation model. As it turns out, right now, both of them are looking at the same stock-Wright First Aerodynmaics, Inc. (WFA). The company has been listed on the NYSE for over 50 years and is widely regarded as a mature, rock-solid, dividend-paying stock. The brothers have gathered the following information about WFA's stock: Current dividend (D) = $2.30/share Current free cash flow (FCF) = $1.5 million Expected growth rate of dividends and cash flows (g) = 5% Required rate of return (r) = 14% Shares outstanding 500,000 shares How would Wilbur and Orville each value this stock?arrow_forwardCompany P/S Multiples Facebook 13.33 Snap 18.22 Twitter 13.27arrow_forwardThe Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $8 million but realizes after-tax inflows of $4.5 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $17 million and realizes after-tax inflows of $4 million per year for 8 years, after which it must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. The cost of capital is 13%. Using the replacement chain approach to project analysis, by how much would the value of the company increase if it accepted the better machine? Round your answer to two decimal places. 1.) $ millionarrow_forward
- Wilbur and Orville are brothers. They're both serious investors, but they have different approaches to valuing stocks. Wilbur, the older brother, likes to use the dividend valuation model. Orville prefers the free cash flow to equity valuation model. As it turns out, right now, both of them are looking at the same stock-Wright First Aerodynmaics, Inc. (WFA). The company has been listed on the NYSE for over 50 years and is widely regarded as a mature, rock-solid, dividend-paying stock. The brothers have gathered the following information about WFA's stock: Current dividend (D) = $3.30/share Current free cash flow (FCF) = $1.5 million Expected growth rate of dividends and cash flows (g)=8% Required rate of return (r) = 13% Shares outstanding 500,000 shares How would Wilbur and Orville each value this stock? The stock price from Wilbur's valuation is $ (Round to the nearest cent.)arrow_forwardThe Perez Company has the opportunity to invest in one of two mutually exclusive machines that will produce a product it will need for the foreseeable future. Machine A costs $8 million but realizes after-tax inflows of $4.5 million per year for 4 years. After 4 years, the machine must be replaced. Machine B costs $17 million and realizes after-tax inflows of $4 million per year for 8 years, after which it must be replaced. Assume that machine prices are not expected to rise because inflation will be offset by cheaper components used in the machines. The cost of capital is 13%. Using the replacement chain approach to project analysis, by how much would the value of the company increase if it accepted the better machine? Round your answer to two decimal places. 1.) $ million What is the equivalent annual annuity for each machine? Do not round intermediate calculations. Round your answers to two decimal places. 2.) Machine A: $ million 3.) Machine B: $ millionarrow_forwardYou expect to have $29,865. You plan to make X savings contribution of $1,690 per month. The expected return is 0.92 percent per month and the first regular savings contribution will be made later today. What is X? Round to 2 decimal places.arrow_forward
- Company P/S Multiples Facebook 13.67 Snap 18.76 Twitter 13.55arrow_forwardEnergy Resources generated an EPS of $4.38 over the last 12 months. The company's earnings are expected to grow by 30.7% next year, and because there will be no significant change in the number of shares outstanding, EPS should grow at about the same rate. You feel the stock should trade at a P/E of around 30 times earnings. Use the P/E approach to set a value on this stock. Using the P/E approach, the value on this stock is $ (Round to the nearest cent.)arrow_forwardThe Anderson Company has a net profits of $20 million, sales of $226 million, and 3.9 million shares of common stock outstanding. The company has total assets of $139 million and total stockholders' equity of $74 million. It pays $2.31 per share in common dividends, and the stock trades at $40 per share. Given this information, determine the following: a. Anderson's EPS. b. Anderson's book value per share and price-to-book-value ratio. c. The firm's P/E ratio. d. The company's net profit margin. e. The stock's dividend payout ratio and its dividend yield. f. The stock's PEG ratio, given that the company's earnings have been growing at an average annual rate of 8.2%. a. Anderson's EPS is $ (Round to the nearest cent.)arrow_forward
- Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $23,000, whereas the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,500 per year, and those for the gas-powered truck will be $4,750 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places. Electric-poweredforklift truck…arrow_forwardA project has an initial cost of $45,000, expected net cash inflows of $9,000 per year for 11 years, and a cost of capital of 14%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to the nearest cent.arrow_forwardA project has an initial cost of $45,000, expected net cash inflows of $9,000 per year for 11 years, and a cost of capital of 14%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round intermediate calculations. Round your answer to the nearest cent.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT

EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Accounting for Derivatives Comprehensive Guide; Author: WallStreetMojo;https://www.youtube.com/watch?v=9D-0LoM4dy4;License: Standard YouTube License, CC-BY
Option Trading Basics-Simplest Explanation; Author: Sky View Trading;https://www.youtube.com/watch?v=joJ8mbwuYW8;License: Standard YouTube License, CC-BY