Answered step by step
Verified Expert Solution
Question
1 Approved Answer
ANSWER THE QUESTION ONLY IF YOU CAN SOLVE ALL THE PARTS OF THE QUESTIONS. IF YOU ARE GOING TO SOLVE ONLY 1 QUESTION. I HAVE
ANSWER THE QUESTION ONLY IF YOU CAN SOLVE ALL THE PARTS OF THE QUESTIONS. IF YOU ARE GOING TO SOLVE ONLY 1 QUESTION. I HAVE ONLY LIMITED QUESTIONS TO ACCESS.
...............................DO NOT ATTEMPT ONLY 1 QUESTION OR ELSE I WILL REPORT YOUR ANSWER.............................
1)
2)
Fethe's Funny Hats is considering selling trademarked, orange-haired curly wigs for University of Tennessee football games. The purchase cost for a 2-year franchise to sell the wigs is $20,000. If demand is good ( 40% probability), then the net cash flows will be $22,000 per year for 2 years. If 60% probability), then the net cash flows will be $7,000 per year for 2 years. Fethe's cost of capital is 12%. Do not round intermediate calculions. a. What is the expected NPV of the project? Negative value, if any, should be indicated by a minus sign. Round your answer to the nearest dollar. b. If Fethe makes the investment today, then it will have the option to renew the franchise fee for 2 more years at the end of Year 2 for anditional payment of $20,000. In this case, the cash flows that occurred in Years 1 and 2 will be repeated (so if demand was good in Years 1 and 2 , it will continue to be good in Years 3 and 4). Write out the decision tree. Note: The franchise fee payment at the end of Year 2 is known, so it should be discounted at the risk-free which is 5%. XYZ Corp. will pay a $2 per share dividend in two months. Its stock price currently is $78 per share. A European call option on XYZ has an exercise price of $72 and 3-month time to expiration. The risk-free interest rate is 0.8% per month, and the stock's volatility (standard deviation) =17% per month. Find the Black-Scholes value of the American call option. (Hint: Try defining one "period" as a month, rather than as a year, and think about the net-of-dividend value of each share.) (Round your answer to 2 decimal places.)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started