You are currently advising the board of The Beverage Company Plc (The Beverage Company), a large company that has interests in the manufacturing, retailing and marketing of beverages in the United Kingdom.

The Beverage Company are considering the potential acquisition of a smaller company, CC Coffee Ltd (CC Coffee). CC Coffee owns a well-known chain of coffee shops in the United Kingdom. The chain has a reputation for providing high quality coffee on the high street and has good future growth prospects.

The following draft calculations have been prepared for the valuation of CC Coffee by an analyst:

Valuation	Details
10.1m	Net Asset Valuation. Calculated using the current company balance sheet.
210.8m	Price-Earnings Ratio Valuation. Calculated by multiplying The Beverage Companys P/E ratio by the earnings of CC Coffee Ltd.

Required:

1. Critically discuss the appropriateness of the two valuation methods described above and discuss a third valuation method that could also be used.

You have also been asked to perform some analysis of the share options that The Beverage Company offers its executive employees. You should assume that the options are one-year European style call options with a strike price of 25 and that no dividends will be paid before the exercise date.

The current share price of The Beverage Company is 22 and the share price volatility (standard deviation) is 24%. Assume that the risk-free rate is 2%.

Required:

2. Using the Black-Scholes option pricing model, calculate the value of each call option. State four limitations of the model.

Note: that d₁ and d₂ should be estimated to two decimal places.