COMMERCE 2FA3 Chapter Notes - Chapter 5: Call Option

• School: McMaster University
• Department: Commerce
• Course: COMMERCE 2FA3
• Professor: Richard Deaves

Document Summary

Chapter 5 questions 1-6 (tutorial 4: you believe that a . 25 dividend will be paid next year on a stock with a required return of 10%. You have an expected future value of +. 25 = . 25 and a discount rate of 10%. If the price was 30. 25/(1+0. 1)=. 50 or less, you would buy the share: a firm is expected to pay a . 75 dividend next period. Using the equation (cid:2868)= (cid:3117) = (cid:2871). (cid:2875)(cid:2873) (cid:2868). (cid:2869)(cid:2870) (cid:2868). (cid:2868)(cid:2871)=(cid:886)(cid:883). (cid:888)(cid:889) we get a value of . 67: mfm corporation pays a constant dividend of . 25 and its shares sell for . An opportunity has recently arisen that would see the next two dividends drop to. . 25 and all future dividends would be . Mfm shares currently yield (6. 25 / 80 =) 7. 8125%. Using that as the discount rate value the alternative plan: (cid:2868)= (cid:2869)+(cid:2868). (cid:2868)(cid:2875)(cid:2876)(cid:2869)(cid:2870)(cid:2873)+ (cid:2869). (cid:2870)(cid:2873) (cid:4666)(cid:2869)+(cid:2868). (cid:2868)(cid:2875)(cid:2876)(cid:2869)(cid:2870)(cid:2873)(cid:4667)(cid:3118)+ (cid:2869). (cid:2870)(cid:2873) (cid:2868). (cid:2868)(cid:2875)(cid:2876)(cid:2869)(cid:2870)(cid:2873)(cid:4666)(cid:2869)+(cid:2868). (cid:2868)(cid:2875)(cid:2876)(cid:2869)(cid:2870)(cid:2873)(cid:4667)(cid:3118)=(cid:882). (cid:885)(cid:885). (cid:2876) This is an increase of . 33 or 12. 9%.