Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 26, Problem 6P
Summary Introduction
Calculate the value of option using Black Scholes model.
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Students have asked these similar questions
A project has an assigned beta of 1.24, the
risk-free rate is 3.8%, and the market rate of
return is 9.2%. What is the project's
expected rate of return?
A. 15.21%
B. 11.41%
C. 10.50%
D. 14.61%
Assume you are risk-averse and have the following three choices.
Standard
Deviation
Project
A
B
C
Expected
Value
$ 2,520
2,930
2,480
$ 1,420
1,050
1,040
a. Compute the coefficient of variation for each.
Note: Round your answers to 3 decimal places.
Project
A
B
C
Coefficient of
Variation
b. Which project will you select?
O Project C
O Project A
O Project B
Consider two project alternatives, project I and project II, with their payoffs and their associated
probabilities outlined in the following table:
Project I
Project II
Payoff
10
15
20
Probability
0.1
0.8
0.1
Payoff
1. Compute RRI for each project;
2. Would you select project I or project II? Why.
5
10
14
Probability
0.2
0.3
0.5
Chapter 26 Solutions
Financial Management: Theory & Practice
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Similar questions
- APT An analyst has modeled the stock of Crisp Trucking using a two-factor APT model. The risk-free rate is 6%, the expected return on the first factor (r1) is 12%, and the expected return on the second factor (r2) is 8%. If bi1 = 0.7 and bi2 = 0.9, what is Crisp’s required return?arrow_forwardA project under consideration has an internal rate of return of 14% and a beta of 0.6. The risk-free rate is 99%, and the expected rate of return on the market portfolio is 14%. a-1. Calculate the required return. Required return 96arrow_forwardAnalyze investment M and investment J using the below. Scenario Probability M Return J Return Strong .30 18% 20% Normal .30 15% 12% Weak .40 9% 5% 1. What is the range for M? 2. What is the average exp. return for M ? 3. What is the standard deviation* M? 3.85 (given) 4. What is the CV for M? 5. What is the range for J? 6. What is the average exp. return for J? 7. What is the standard deviation J? 6.22 (given) 8. What is the CV for J? 9. Which is the better choice?arrow_forward
- Suppose that you found the probabilities and expected NPVs of 3 scenarios for a timing option: E(NPV) probability $0.15 0.30 $10.35 0.50 $42 0.20 1. What is the expected NPV of the timing option? Show your work. 2. Suppose, that the expected NPV of the project if proceeding today is $14. Should the project be delayed based on your finding in part 1 or should the management implement it today? Briefly explain.arrow_forward2. There are two projects, X and Y. the following probability distribution for the projects are given below PROJECT X PROJECT Y Return Prob. Return Prob. Pessimistic 8% 0.25 7% 0.35 Most Likely 16 0.50 13 0.45 Optimistic 21 0.25 22 0.20 Which project should you take based on Risk and Return?why?arrow_forward39arrow_forward
- Given an optimal risky portfolio with expected return of 20%, standard deviation of 24%, and a risk free rate of 7%, what is the slope of the best feasible CAL? A. 0.64 B. 0.14 C. 0.33 D. 0.62 E. 0.54arrow_forwardPlease answer all questionsarrow_forward10) Given an optimal risky portfolio with expected return of 15%, standard deviation of 26%, and a risk free rate of 5%, what is the slope of the best feasible CAL? A) 0.64 B) 0.27 C) 0.08 D) 0.38 E) 0.36 Provide explanation for the correct answer.arrow_forward
- Given an optimal risky portfolio with expected return of 16%, standard deviation of 20%, and a risk-free rate of 4%, what is the slope of the best feasible CAL? A. 0.14 B. 0.31 C. 0.60 D. 0.36 E. 0.08arrow_forwardCompute the expected rate of return on investment i, given the following information: Rf=9%; CAPM=14%; beta i=1.0. Recalculate the required rate of return assuming beta i is 1.5arrow_forwardUse the required return-beta equation from the CAPM What is the required return if the risk-free rate is 4%, beta 1.5 and the expected market return 8%? What is the risk-free rate if beta is 1.1, the required return 8.4% and the expected market return 8%? What is beta if the risk-free rate is 4%, the required return 12% and the expected market return 8%? What is the expected market return if the risk-free rate is 4%, beta 1.5 and the required return 12%?arrow_forward
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