Problem 1: The exercise price on one of Flanagan Company's options is $15, its exercise value is $22, and its time value is $5. What are the option's market value and the price of the stock?
Problem 2: Assume you have been given the following information on Purcell Industries:
Current stock price = $15 Strike price of option = $15
Time to maturity of option = 6 months Risk-free rate = 6%
Variance of stock return = 0.12 d1 = 0.24495
d2 = 0.00000 N(d1) = 0.59675
N(d2) = 0.50000
Using the Black-Scholes Option Pricing Model, what would be the value of the option?
Problem 3: The current price of a stock is $33, and the annual risk-free rate is 6%. A call option with a strike price of $32 and 1 year until expiration has a current value of $6.56. What is the value of a put option written on the stock with the same strike price and expiration date as the call option?
Problem 4: Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $20 million. Kim expects that the hotel will produce positive cash flows of $3 million a year at the end of each of the next 20 years. The project's cost of capital is 13%.
a. What is the project's net present value?
b. While Kim expects the cash flows to be $3 million a year, it recognizes that the cash flows could, in fact, be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $2.2 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $3.8 million. Kim is deciding whether to proceed with the hotel today or to wait 1 year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $20 million. Assume that all cash flows are discounted at 13%. Using decision tree analy¬sis, should Kim proceed with the project today or should it wait a year before deciding?