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Problem:

Stewart Enterprises' current stock price is $60 per share. Call options for this stock exist that permit the holder to purchase one share at an exercise price of $50. These options will expire at the end of 1 year, at which time Stewart's stock will be selling at one of two prices, $40 or $75. The risk-free rate is 7%. As an assistant to the firm's treasurer, you have been asked to perform the following tasks to arrive at the value of the firm's call options.

Required:

Question 1: Find the range of values for the ending stock price in 1 year.

Question 2: Find the range of values for the call option at the option's expiration in 1 year.

Question 3: Equalize the range of payoffs for the stock and the option. (Round your answer to two decimal places) The ratio of ending price to ending stock value is

Question 4: Create a riskless hedged investment. (Round your answer to two decimal places) Portfolio value is

Question 5: What is the cost of the stock in the riskless portfolio? (Round your answer to two decimal places)

Question 6: What is the present value of the riskless portfolio? (Round your answer to two decimal places.)

Question 7: From your answers in Parts d and e, what is the value of the firm's call option?

Note: Please explain comprehensively and give step by step solution.

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91170673

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