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Black-Scholes Option Pricing, Residual dividend distribution

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1) What is the value of a 9-month call with a strike price of \$45 given the Black-Scholes Option Pricing Model and the following information?
Stock price \$48
Exercise price \$45
Time to expiration .75
Risk-free rate .05
N(d1) .718891
N(d2) .641713

2) Chandler Communications' CFO has provided the following information:
? The company's capital budget is expected to be \$5,000,000.
? The company's target capital structure is 70 percent debt and 30 percent equity.
? The company's net income is \$4,500,000.

If the company follows a residual distribution policy (with all distributions in the form of dividends), what portion of its net income should it pay out as dividends this year?

Solution Preview

1)What is the value of a 9-month call with a strike price of \$45 given the Black-Scholes Option Pricing Model and the following information?
Stock price       \$48
Exercise price       \$45
Time to expiration       .75
Risk-free rate       .05
N(d1)      .718891
N(d2)     .641713

We will use Black Scholes Pricing Formula
Value of call= S N(d1) - X * e ^{ -r(T-t) } * ...

Solution Summary

Calculates the value of a call option using Black-Scholes Option Pricing Model and the dividend paid using residual dividend distribution policy.

\$2.19