solution-to-last-three-questions

# solution-to-last-three-questions - Solution to the last...

This preview shows pages 1–4. Sign up to view the full content.

Solution to the last three questions Question 39 Year 0 1 2 3 revenue 1000 1000 1000 cost 500 500 500 depreceation 600 600 600 working capital 100 100 100 Cash flows from Operations 530 530 530 Cash flows from the change of working capital -100 0 0 Cash flows from capital investment -3000 Free cash flows -3000 430 530 530 PV -3000 373.91 400.76 348.48 NPV -1267.08 When I calculate the cash flows from the operations, I use the third formula discussed in the lecture. That is, cash flows from opearations = (Reven Question 40 (a) Use two-period binomial tree Each period is three month. So rf = 4%/4 =1% and Rf =1 Sigma =0.25, h =1/4 =0.25 year u =exp(sigma*sqrt(h))=exp(0.25*sqrt(0.25))= 1.13 d=1/u = 0.88 The risk-neutral probability for up is p=(Rf-d)/(u-d)=(1.01-0.883)/(1.133 We have three states in period 2: uu, ud, dd In uu, S2= 100*1.133*1.133 = 128.4 in sd, S2 = 100*0.883*1.133= 100 in dd, S2 =100*0.883*0.883 = 78 , where S2 Remember we exercise the option in period 2. So the ex where Cuu=Cud=0, Cdd = max( 100 -78,0)=2 So, the price of the Put option is (b) Your uncle's deal Let S1 be the stock price for IBM one year later.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern