Documente Academic
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6th Edition
RICHARD A. BREALEY AND STEWART C. MYERS
Chapter 4
Time Value of
Common Stocks
2. Graph the put and call over a range of stock prices.
1. Use the B-S formula to value the Blitzen Mark II follow-on option in Table 21-2. Using
the following values:
2. What happens to the value of the option as the forecast of future cash flows is reduced to
million? $600 million?
3. Vary the standard deviation (assuming the project's PV does not change). Note that the
more uncertain the project value, the more valuable the follow-on option.
4. Graph what happens to the value of the option as the decision date to invest grows near but
the cash flow forecast remains unchanged.
Value of Call Option
at Different Stock Prices
60
50 Time to Expiration
Value of Call Option
00
8.
00
6.
00
4.
00
2.
00
0. 15.00 20.00 25.00 30.00 35.00 40.00 45.00 50.00 55.00 60.00 65.00
Present Price of Stock
Value of a Call as Expiration Date Nears
18
16