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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?

    © BrainMass Inc. brainmass.com October 9, 2019, 11:04 pm ad1c9bdddf
    https://brainmass.com/business/black-scholes-model/black-scholes-option-pricing-residual-dividend-distribution-243359

    Solution Preview

    Please see attached file

    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