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Problem 22-28 Two-State Option Pricing Model Maverick Manufacturing, Inc., must purchase gold in three months for use in its operations. Maverick's management has estimated that if the price of gold were to rise above $1,570 per ounce, the firm would go bankrupt. The current price of gold is $1,490 per ounce. The firm's chief financial officer believes that the price of gold will either rise to $1,685 per ounce or fall to $1,380 per ounce over the next three months. Management wishes to eliminate any risk of the firm going bankrupt. Maverick can borrow and lend at the risk-free EAR of 7.0 percent. a-1. Should the company buy a call option or a put option on gold? Call option Put option a-2 What strike price would the company like this option to have? (Do not round intermediate calculations.) Strike price b. How much should such an option sell for in the open market? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Option price $ c. Suppose no options currently trade on gold. What are the transactions needed to create a synthetic option with identical payoffs to a traded option? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) c-1. $ shares of stock (Click to select) c-2. Amount $ to (Click to select) d. How much does the synthetic option cost? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Synthetic option $ Problem 22-24 Mergers and Equity as an Option Sunburn Sunscreen has a zero coupon bond issue outstanding with a $29,000 face value that matures in one year. The current market value of the firm's assets is $30,700. The standard deviation of the return on the firm's assets is 37 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $33,000 that matures in one year. The current market value of the firm's assets is $36,400. The standard deviation of the return on the firm's assets is 43 percent per year. Suppose Sunburn Sunscreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firm's return on assets will have a standard deviation of 21 percent per year. a-1.What is the combined value of equity in the two existing companies? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Equity $ a-2.What is the combined value of debt in the two existing companies? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Debt $ b-1.What is the value of the new firm's equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Equity $ b-2.What is the value of the new firm's debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Debt $ c-1.What was the gain or loss for shareholders? (Loss amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Gain / Loss $ c-2.What was the gain or loss for bondholders? (Loss amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Gain / Loss $