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FI516_Homework3_BrianLin

# FI516_Homework3_BrianLin - Brian Lin D01278742 Week 3...

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Brian Lin D01278742 Week 3 Homework Chapter 8 Questions Problem 8-1 A call option on the stock of Bedrock Boulders has a market price of \$7. The stock sells for \$30 a share, and the option has a strike price of \$25 a share. What is the exercise value of the call option? What is the option’s time value? Stock Price \$30 (a) Strike Price \$25 (b) Price of Option \$7 (c) Exercise Value of Option \$5 (d) = (a) – (b) Time Value of Option \$2 (c) – (d) Problem 8-2 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? Exercise Value of Option \$22 Exercise Price of Option \$15 Time Value of Option \$5 Option’s Market Value \$27 (Exercise Value of Option + Time Value of Option) Price of the Stock \$37 (Price of Stock – Exercise Value of Option = Exercise Price of Option) Chapter 15 Questions Problem 15-8 The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Assets (book = market) = \$3M EBIT = \$500K Cost of Equity, r s = 10%

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