1. The one year call option on Caddo Inc. stock has an exercise price of 45. The current value of Caddo is 46. On the maturity date, the value of Caddo will be either 51 or 43. The risk free rate is 3%. Use the binomial option pricing model to find a fair value for the call option.
2. Given the following data for Year 1: Net Income = $4 million; Depreciation = $1 million; Investment in fixed assets = $1 million; Investment in net working capital = $1 million. Principal payments on debt were $1 million. New debt raised totaled $2.0 million during the period. Calculate the free cash flow to equity for Year 1: