Question
An analyst is interested in using the Black-Scholes model to value call options on the stock of Bearcat, Inc. The analyst has accumulated the following
An analyst is interested in using the Black-Scholes model to value call options on the stock of Bearcat, Inc. The analyst has accumulated the following information: The price of the stock is $40 The strike price is $44 The option expires in 3 months The variance of the stocks returns is .16 The risk-free rate is 7 percent
Using the Black-Scholes option pricing model, what is the value of the call option for Bearcat, Inc.?
For Bearcat Inc.'s call option, what would you expect to pay for this option if management was changed at the top levels of Bearcat following a takeover, and the new management team engaged in riskier types of projects and capital spending, thus, increasing the overall variability of returns for the underlying stock?
What if Bearcat's new management team cut the dividend, what would you expect to see happen to the price of the call option?
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