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Calculating Pre-Tax Net Profit

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A reliable source has told you Johnson Company's stock price will increase from where it is now at $22.50 at an undetermined point over the coming 5 months. For $310.25 now you could buy a 5-month call option which lets you buy 100 shares at $25/share. Suppose you purchase that option for $310.25 and Johnson's stock price does indeed rise to $45, what would your pre-tax net profit be?

A. -$310.25
B. $1,689.75
C. $1,774.24
D. $1,862.95
E. $1,956.10

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The expert examines calculating ore-tax net profits.

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B. $1,689.75

100 shares at $25 leads to outflow of 2500+ ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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