fm13 22 - the exercise date. Here is the time line. The...

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Mini Case: 13 - 22 i. Use a financial option model to estimate the value of the growth option. Answer: X = Strike Price = Cost Of Implement Project = \$75 million. R RF = Risk-Free Rate = 6%. T = Time To Maturity = 3 years. P = Current Price Of Stock = Current Value Of The Project’s Future Cash Flows. σ 2 = Variance Of Stock Return = Variance Of Project’s Rate Of Return. We explain how to calculate P and σ 2 below. Step 1: Find the value of all cash flows beyond the exercise date discounted back to
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Unformatted text preview: the exercise date. Here is the time line. The exercise date is year 1, so we discount all future cash flows back to year 3. 0 1 2 3 4 5 6 High \$45 \$45 \$45 Average \$30 \$30 \$30 Low \$15 \$15 \$15 High: PV 3 = \$45/1.10 + \$45/1.10 2 + \$45/1.10 3 = \$111.91 Average: PV 3 = \$30/1.10 + \$30/1.10 2 + \$30/1.10 3 = \$74.61 Low: PV 3 = \$15/1.10 + \$15/1.10 2 + \$15/1.10 3 = \$37.30 The current expected present value, P, is: P = 0.3[\$111.91/1.1 3 ] + 0.4[\$74.61/1.1 3 ] + 0.3[\$37.30/1.1 3 ] = \$56.05....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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