ABC has made the following offer to buy Titans. . In 6 months time if ABC stock price is between 40 and 50 Titans can exchange one of its shares for 50 dollars. If the price is below 40, however, then Titans will receive 1.25 times the share price of ABC in 6 months. On the other hand if the ABC's stock price is above 50 then NYL can exchange 1 share of Titans for the dollar price of one share of ABC.

1. Draw the payout diagram that shows what one share of Titans would be worth in 6 months under this proposal. Clearly indicate the axes and the values at critical points.

2. Explain how you would value the deal today from the perspective of an Titans shareholder. Provide significant details of all the steps that you would go through to come up with an exact number. Now assume the stock price of ABC is 45 dollars. The volatility is 28% per year. The risk free rate is 6% per year continuously compounded and the dividend yield is 2% per year continuously compounded. Value the deal.