1) An analyst wants to use the Black-Scholes model to value call options on the stock of Heath Corporation based on the following data: the price of the stock is $70; the strike price of the option is $68; the option matures in 6 months; the standard deviation of the stocks returns is 0.18, and the risk-free rate is 3%. Using the Black-Scholes model, what is the value of the call option if d1=0.4092?
2)You are thinking about investing in a 1-year call option on GE stock with an exercise price of $55.5. The current price of a stock is $52, and at the end of one year its price will be either $58 or $48. Based on the binomial model, what is the options value if the annual risk-free rate is 6%?
3)The potential loss for a writer of a call option on a stock is
a.
equal to the call premium.
b.
limited.
c.
increasing when the stock price is decreasing.
d.
unlimited.
Suppose a 6-month maturity call option with exercise price $80 currently sells for $10. Consider a portfolio with $6000 invested in three at-the-money call contracts and $4000 in 6-month T-bills to earn 2% return. Whats the portfolio return when the stock price becomes $110?a.0.008
b.1.208
c.0.012
d.17.408
5) Broadcom Inc is expected to have EPS of $2 in the coming year and the stock price of $140 a year from now. If the firm is expected to continue to retain 82% of earnings for the foreseeable future, what must be its growth rate if the required return is 11%?
6) According to the Dividend Discount Model, there is a positive relationship between stock price and dividends. Therefore, the lower the dividend payout ratio, the lower the stock price. Is it correct? Explain.
7) The three call options issued by Square Inc are listed below. Suppose that the current price of Square is $238.48. Today is May 16, 2023.OptionOption priceStrike priceExpiration date
A$2.73$260.00May 25, 2023
B$15.60$240.00June 1, 2023
C$30.20$220.00July 30, 2023
Because Option C has a longer time before expiration than Options A and B, it has the highest time value. Is it correct? Explain.
