1. Pinder Ltd is considering buying the patent rights to a recently developed drug to treat eczema for $30.1 million. There is only 2 years left on the life of the patent, after which Pinder Ltd would not be able to compete with generic drug manufacturers. In order to produce the drug, Pinder Ltd would need to spend $9.7 million each year to use production facilities owned by other firms, and each pill would cost Pinder Ltd $0.20 to make. Because Pinder Ltd will borrow existing production facilities from other firms, it can choose whether to produce the drug each year. Pinder Ltd is able to gauge demand for the drug at the start of each year. If there is high demand, Pinder Ltd will be able to sell 10 million pills during the year and if there is low demand, Pinder Ltd will be able to sell 0.5 million pills during the year. In any year, if there is high demand for the drug, there will always continue to be high demand for drug during the remaining life of the patent. In any year, if there is low demand for the drug, the following year can have high demand or low demand. The probability that there will be high demand is 42% and the probability that there will be low demand is 58%. Due to government regulation, the price of the drug is fixed at $4.8 per pill, regardless of demand. The required rate of return for Pinder Ltd is 10%. Assume cash flows occur at the end of each year, except for initial cash flows. Based only on the information above, what is the present value of the option to delay production of the drug, using the decision-tree method? (round to the nearest two decimal places)

$5.74 million

None of the other answers.

$5.96 million

$6.38 million

$6.45 million

2. Pinder Ltd buys 406,006 barrels of crude oil each year to produce 308,633 barrels of refined oil products. Pinder Ltd has a price policy where Pinder Ltds refined oil products are priced at 200% of the crude oil price. Pinder Ltd has no problems selling all of its products as long as it keeps to that price policy. For example, if the price of crude oil is $18 per barrel, the price of Pinder Ltds refined oil products will be $36 per barrel. Last year, the price of crude oil was $40 per barrel, and all other costs for Pinder Ltd excluding the cost of purchasing crude oil, such as wages and maintenance costs, added up to a total of $1,000,000. The price for this years crude oil has yet to be determined, but Pinder Ltd expects crude oil prices to remain at $40 per barrel with 40% probability, fall to $30 per barrel with 30% probability, and rise to $50 per barrel with 30% probability. Additionally, the other costs (which was $1,000,000 last year) is expected to rise by 10% this year, regardless of crude oil prices. Pinder can go long on call or put options with the crude oil as the underlying asset and an exercise price of $40 that expire this year, when the profits for the firm are generated. The price of the call/put options are $0.09 per option, where one option gives the holder the right to buy/sell one barrel of crude oil. Pinder Ltd wants to take the smallest option position possible so that its net income for this year does not fall below $6,000,000. Assume that there are no taxes. Based only on the information above, which of the following option positions should Pinder Ltd take? (round to the nearest two decimal places)

Long 66,912.05 call options

Long 66,912.05 put options

None of the other answers.

Long 76,912.21 call options

Long 76,912.21 put options