homework -2

MBAD 6234

Homework Assignment 2

Due at 6:10 pm August  12th, 2013

1. Sorenson Corp.’s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future.  What is Sorenson’s expected stock price in 7 years, i.e., what is ?

 

1. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product.  Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0.  The company’s last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%.  What is the current price of the common stock?

  

1. An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data:

  

The price of the stock is $40.

 

The strike price of the option is $40.

 

The option matures in 3 months (t = 0.25).

 

The standard deviation of the stock’s returns is 0.40, and the variance is 0.16.

 

The risk-free rate is 6%.

Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:

 

• d1 = 0.175

 

• d2 = -0.025

 

• N(d1) = 0.56946

 

• N(d2) = 0.49003

 

Using the Black-Scholes model, what is the value of the call option?