DeVry Chicago FI504 ACCOUNTING P08 Build a Model and P07 Build a Model

Chapter 8 Ch08 P08 Build a Model

You have been given the following information on a call option on the stock of Puckett Industries:

P = $65 X = $70

t = 0.5 rRF = 4%

s = 50.00%

a. Using the Black-Scholes Option Pricing Model, what is the value of the call option?

First, we will use formulas from the text to solve for d1 and d2.

Hint: use the NORMSDIST function.

(d1) = N(d1) =

(d2) = N(d2) =

Using the formula for option value and the values of N(d) from above, we can find the call option value.

VC =

b. Suppose there is a put option on Puckett’s stock with exactly the same inputs as the call option. What is the value of the put?

Put option using Black-Scholes modified formula =

Put option using put-call parity =

P07 Build a Model

Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This same supernormal growth rate is expected to last for another 2 years (g1 = g2 = 20%).

a. If D0 = $ 1.60 and rs = 10%, what is TTC’s stock worth today? What are its expected dividend and capital gains yields at this time, that is, during Year 1?

b. Now assume that TTC’s period of supernormal growth is to last for 5 years rather than 2 years. Calculate the price, dividend yield, and capital gains yield for Year 1.

c. What will TTC’s dividend and capital gains yields be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth; the calculations are very easy.)

d. TTC recently introduced a new line of products that has been wildly successful. On the basis of this success and anticipated future success, the following free cash flows were projected: