Exam 13: Corporate Applications

What is the expected return on equity using the Black-Scholes formula, given a zero-coupon bond that pays $250 at maturity in 4 years? Assume assets are worth $200, r = 0.05, σ = 0.30, and no dividend is paid. The return on assets is 11.5%.

A company issues an option grant with an outperformance feature, against the S&P 500. Assume S&P 500 = 1100, S = 46, k = 45, σ = 0.30, r = 0.04, and 10 years until expiration. The S&P 500 has a dividend yield of 2.5%, standard deviation of 20.0% and a 0.45 correlation coefficient with the stock. What is the value of the outperformance option?

A firm with assets value at $350,000 issues a 5 year zero-coupon bond with a par value of $400,000. Interest rates are 5% and the volatility of the companyʹs assets are determined to be )29. If the company pays no dividend, what is the delta of the issued debt?

Willco, Inc. issues compensation options with the following terms. Strike = $45, price = $42.00, σ = 0.48, r = 0.05, div = 0.02. What is the value of the option if it will be repriced at $30? Assume 10 years to expiration.

A company issues an option grant with an outperformance feature, against the S&P 500. Assume S&P 500 = 950, S = 22, k = 25, σ = 0.25, r = 0.06, and 5 years until expiration. The S&P 500 has a dividend yield of 2%, standard deviation of 18.0% and a 0.30 correlation coefficient with the stock. What is the value of the outperformance feature?