46. You are the sole owner of a company. The value of your business depends on how well the Australian economy does in the post-vaccination period. The following binomial tree represents your view of what your firm's cash flows will be during the next two years. The diagram suggests that there is a substantial chance that your company will experience below par cash flows in the next two years. Your friend, Ms. Guilder, gives you a non-retractable offer to buy your company for $175 million at any time within the next year. Use a discount rate of 10%. Assume that your firm will shut down after two years. If you need to make any additional assumptions, please state them.

a. Find the NPV of the future cash flows to estimate your firm's value now (without using Ms. Guilder's offer).

b. Draw the binomial tree, assuming that you take-up your friend's offer.

c. What is the value of the offer to you?

d. What type of option is Ms. Guilder offering you? What is the maximum amount she could charge you for this option?