Question

(please show work for each step)

You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. JCH stock currently trades for $24.11 per share. You can sell the shares of JCH that you will receive in the market at any time. But as part of the offer, JCH also agrees that at the end of one year, it will buy the shares back from you for $24.11 per share if you desire. Suppose the current one-year risk-free rate is 5.66%, the volatility of JCH stock is 29.8%, and JCH does not pay dividends. Round all intermediate values to five decimal places as needed. a. Is this offer worth more than $24.11 million? Explain. b. What is the value of the offer? a. Is this offer worth more than $24.11 million? Explain. (Select the best choice below.) O A. The offer is worth more than $24.11 million because you might be able to sell the shares at a higher price. O B. The offer is worth exactly $24.11 million because that is the price of the shares today. C. The offer is worth more than $24.11 million because of the put option. OD. The offer is worth less than $24.11 million because of the put option. b. What is the value of the offer? The value is $ million. (Round the two decimal places.)

Answer 1

1.
Option C

2.
=24.11+2.16=26.27 million

A В Н 1 Input Data 2 Stock Price now (P) 3 Exercise Price of Option (EX) 4 Number of periods to Exercise in years (t) 5 Compounded Risk-Free Interest Rate (rf) 6 Standard Deviation (annualized o) 24.11 24.11 5.66% 29.80% 7 8 9 Output Data 10 Present Value of Exercise Price (PV(EX)) 11 *t.5 22.7833 0.2980 12 d1 0.3389 13 d2 0.0409 14 Delta N(d1) Normal Cumulative Density Function 15 Bank Loan N(d2) PV(EX) 0.6327 11.7636 16 17 Intrinsic Value of Call 18 Intrinsic Value of Put 0.0000 0.0000 19 20 Time Value of Call 3.4901 21 Time Value of Put 2.1634 22 23 Total Value of Call 3.4901 24 Total Value of Put 2.1634 25

A 1 Input Data 2 Stock Price now (P) 3 Exercise Price of Option (EX) 4 Number of periods to Exercise in years (t) 24.11 24.11 1 5 Compounded Risk-Free Interest Rate (rf 6 Standard Deviation (annualized 0.0566 0.298 7 8 9 Output Data =++C3*EXP ( -C5*C4) +C6*C4 0.5 10 Present Value of Exercise Price (PV(EX)) 11 *t.5 12 d1 13 d2 ++(LN(C2/C3)+(C5+C6*C6/2)*C4)(C6*C4A0.5) +C12-C11 14 Delta N(d1) Normal Cumulative Density Function 15 Bank Loan N(d2)*PV(EX) =NORMDIST(C12,0,1,TRUE) NORMDIST (C13,0,1,TRUE)*C10 16 17 Intrinsic Value of Call 18 Intrinsic Value of Put MAX(C2-C3,0) MAX (C3-C2,0) 19 20 Time Value of Call -C23-C17 21 Time Value of Put -C24-C18 22 - +C14*C2-C15 23 Total Value of Call 24 Total Value of Put =+C23+C10-C2 26