1.The price of Ervin Corp. stock will either be $64 or $80 at the end of the year. Call options are available with one year until expiration.Continuously compoundedT-bills currently yield 2.02 %. Suppose the current price of Ervin stock is $74.

What is the value ofthe call option, using therisk-free approach, if the strike price is $55 per share? (Round answer to 2 decimal places. Do not round intermediate calculations).

2.A stock is currently selling for $38 per share. A call option with an exercise price of $45 sells for $2.95 and expires in three months. If the risk-free rate of interest is 3.76 % per year,compounded continuously, what is the price of a put option with the same exercise price and expiration? (Round answer to 2 decimal places. Do not round intermediate calculations).

3.Your company is deciding whether to invest in a new machine. The new machine will increase cash flow by $332,214 per year. You believe the technology used in the machine has a 10-year life; in other words, no matter when you purchase the machine, it will be obsolete 10 years from today. The machine is currently priced at $1,760,000. The cost of the machine will decline by $110,000 per year until it reaches $1,320,000, where it will remain. The required return is 12%.

What is the value of the option to wait2 years to purchases the machine? (Round answer to 2 decimal places. Do not round intermediate calculations)

4.Osceola Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $34.3 million. If the HD DVD fails, the present value of the payoff is $12.5 million. If the product goes directly to market, there is a 60 percent chance of success. Alternatively, Osceola can delay the launch by one year and spend $1.34 million to test-market the HD DVD. Test-marketing would allow the firm to improve the product and increase the probability of success to 80%. The appropriate discount rate is 10%.

What is the value of the optionto test-market before going to market? (Round answer to 2 decimal places. Do not round intermediate calculations)