Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 22, Problem 21PS
Summary Introduction
To determine: The put value.
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A defender and a challenger are considered in a replacement analysis. The following decision tree
includes the data where FC: first cost, AB: annual benefit; C: Challenger and D: Defender. If annual
compound interest rate is 10%, when must we replace the defender?
Node no branch Cash flow
FC=-45,000 $
Life=20 yrs
AB= +8,500 $
FC=-10,000 $
Life=5 yrs
AB= +4,500 $
FC=-10,000 $
Life=5 yrs
10
2 D
1D
AB= +5,500 $
FC=-35,000 $
Life=15 yrs
AB= +4,500 $
FC=-10,000 $
Life=5 yrs
AB= +5,000 $
FC=-25,000 $
Life=10 yrs
AB= +9,000 $
FC=-20,000 $
Life=5 yrs
AB= +6,000 $
FC=-15,000 $
Life=5 yrs
AB= +5,000 $
20
3
1D
20
10
2 D
Compute the price of the European call option using the R program introduced in class where K = 100, S0 = 85, r = 10%, σ = 25% and T=0.5 Year.
a. Use the Black-Scholes-Merton formula.
b. Use the Monte-Carlo method. (Decide on the number of iterations and time step by your own)
c. Compare the results in part a and b.
d. Do the same calculations for the put option price where all parameters are the same
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Chapter 22 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Prob. 2PSCh. 22 - Prob. 3PSCh. 22 - Prob. 4PSCh. 22 - Prob. 5PSCh. 22 - Prob. 6PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 8PSCh. 22 - Prob. 9PSCh. 22 - Expansion options Look again at Table 22.2. How...
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- Salalah Wind Energy has taken up a new project with an initial investment of 50000 OMR.The expected future cashflow from the project over the next three years will be 22500 OMR, 23500 OMR and 24500 OMR.What is the profitability index if the discount rate is 7 percent? Select one: O a. 1.48 O b. 1.23 O c. 1.44 O d. 1.63 O e. None of thesearrow_forwardDon't provide handwritten solution... ALFA’s price is currently ¥8,000. At the end of one month when its options expire, the price is either go up by 5% or down by 15%. If the risk-free is –0.20% for the period, what should be the value of a put with a strike price of ¥7,950? * ¥299.60 ¥333.67 ¥236. 93arrow_forwardWhat is the delta of a European put option with the following parameters? s0 = $40k = $46 r = 10%sigma = 20%T = 0.75 years (required precision 0.01 +/- 0.01) Greeks Reference Guide: Delta = ∂π/∂S Theta = ∂π/∂t Gamma = (∂2π)/(∂S2) Vega = ∂π/∂σ Rho = ∂π/∂rarrow_forward
- Calculate the issue pricearrow_forwardYou are asked to investigate the three investment options shown in the table below for your fırm using incremental rate of return analysis. Your firm's MARR is 12%. The first incremental analysis you should perform using a defender-challenger approach is: Option A В C -8000 -6000 -10000 1 3500 2200 4200 2 3500 2300 4000 3500 2400 3800 IRR 15% 7% 10% O A-B O B-C O C-A O Incremental analysis is not required Yeararrow_forwardPlease don't use AI solutionarrow_forward
- 6. Since the minimum return rate is 6%, which of the following options is more appropriate? option A option B 100 option C 200 option D 500 Investment cost, ECU Annual profit, ECU/yıl 400 100.9 27.7 46.2 125.2 For all options, the service life is 5 years and the scrap value is zero.arrow_forwardUse a Compound interest table instead of the formula. Also please only Solve PART B. Please solve by hand and DO NOT USE Excel.arrow_forwardHow long do the following options have before they expire?Call Price = $5Put Price = $9Stock Price = $65Exercise Price = $70Risk-free rate = 3% per annumarrow_forward
- 10) Which of the following two options for purchasing an equipment has a lower net present cost? Assume a discount rate of 0.05. (Hint: Use Excel for easier calculations.) a. Initial payment of $2000, then $550 monthly for4 months. b. Initial payment of $3000, then $200 monthly for 5 months. 11) Why should a higher discount rate be applied to an investment with a higher risk?arrow_forwardOptions2. Construct profit diagrams at expiration time to show what position in META puts, calls and/or underlying stock best expresses the investor’s objectives described below. META currently sells for $210 so that profit diagrams between $150 and $250 in $10 increments are appropriate. Assume that at-the-money puts and calls currently cost$30 each. The call with strike $190 costs $40 and the call with strike $230 costs $20. (a) An investor wants to benefit from META price drops but does not want to lose more than $30 on the investment. (b) An investor wants to have a positive payoff if the upcoming META earnings announcement is close to market expectations—meaning that the price will not move by more than $20 dollars.arrow_forwardSuppose a Japanese company, Matsushita, has to sell Can$ 50 m sometime during the next 6 months, and would like to lock in a minimum ¥ value. The price of a put option with a strike price of K = ¥ 230/$ is ¥ 4/$ What is the actual amount that they receive if the spot rate at the end of 3 months is ¥ 245/$?Since ST >K, the options are worthless and Matsushita can do better by selling at the market rate of ¥ 245/$, rather than the exercise price of ¥ 230/$. Thus, their total receipts will be O¥4/$ O¥ 234 / $ O¥241/$ O¥ 230 / $arrow_forward
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