01 ModelHW1

# 01 ModelHW1 - 6-1 P = \$15 X = \$15 t = 0.5 rRF = 0.06 2 =...

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Unformatted text preview: 6-1 P = \$15; X = \$15; t = 0.5; rRF = 0.06; 2 = 0.12; d1 = 0.24495; d2 = 0.0000; N(d1) = 0.59675; N(d2) = 0.500000; V = ? Using the Black-Scholes option's value as: V = P[N(d1)] Option Pricing Model, you calculate the Xe -rRF t [N(d2)] = \$15(0.59675) - \$15e(-0.10)(0.5)(0.50000) = \$8.95128 - \$15(0.9512)(0.50000) = \$1.6729 \$1.67. 14-2 a. 0 2 3 4 10% 1 -8 4 4 4 4 NPV = \$4.6795 million. b. Wait 2 years: 0 r = 10% 1 | | 10% Prob. 0 0 | 90% Prob. 0 | 0 2 | -9 | -9 3 | 2.2 | 4.2 4 | 2.2 | 4.2 5 | 2.2 | 4.2 6 | 2.2 | 4.2 PV @ Yr. 2 \$6.974 \$13.313 Low CF scenario: NPV = (-9 + 6.974)/(1.1)2 = -\$1.674 High CF scenario: NPV = (-9 + 13.313)/(1.1)2 = \$3.564 Expected NPV = .1(-1.674) + .9(3.564) = 3.040 If the cash flows are only \$2.2 million, the NPV of the project is negative and, thus, would not be undertaken. The value of the option of waiting two years is evaluated as 0.10(\$0) + 0.90(\$3.564) = \$3.208 million. Since the NPV of waiting two years is less than going ahead and proceeding with the project today, it makes sense to drill today. 14-7 P = PV of all expected future cash flows if project is delayed. From Problem 14-2 we know that PV @ Year 2 of Low CF Scenario is \$6.974 and PV @ Year 2 of High CF Scenario is \$13.313. So the PV is: P = [0.1(6.974)+ 0.9(13.313] / 1.102 = \$10.479. X = \$9. t = 2. rRF = 0.06. 2 = 0.0111. r = 10% d1 = ln[10.479/9] + [0.06 + .5(.0111)](2) = 1.9010 (.0111)0.5 (2)0.5 d2 = 1.9010 - (.0111)0.5 (2)0.5 = 1.7520 From Excel function NORMSDIST, or approximated from the table in Appendix A: N(d1) = 0.9713 N(d2) = 0.9601 Using the Black-Scholes Option Pricing Model, you calculate the option's value as: V = P[N(d1)] - [N(d2)] = \$10.479(0.9713) \$9e(-0.06)(2)(0.9601) = \$10.178 - \$7.664 = \$2.514 million. Mini Case: 13 - 2 ...
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## This note was uploaded on 05/12/2010 for the course BUSINESS BS525 taught by Professor Matthews during the Winter '10 term at Drexel.

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01 ModelHW1 - 6-1 P = \$15 X = \$15 t = 0.5 rRF = 0.06 2 =...

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