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- June 1, 2020 at 12:21 pm
Why do we add the call value of 2248 at year 0 this must be the amount that we have to pay for the project and should be deducted? Please explain.June 1, 2020 at 4:14 pm
Because you say the question is adapted, I assume that you are looking at it in the Kaplan Kit (it isn’t in the current edition of the BPP Kit).
I only have the original exam question and answer.
In the original answer, part (a) is the valuation of the option which is $2,241.
Part (b) asks for the calculation of the coupon rate to the lenders so as to give them a 13% return. So as far as the lenders are concerned, then are paying 10,000 immediately and receiving a warrant worth 2,241. So the net amount effectively being lent by them at time 0 is 10,000 less 2,241.June 1, 2020 at 6:26 pm
But this call option given to shareholder will depend upon whether they exercise or not, so why we take its value on 0 year?June 2, 2020 at 7:14 am
But the whole point of option pricing is to put a value ‘today’ on the option. Whether or not they will end up exercising will not be known until the option matures. ‘Today’s’ value depends on the likelihood of it being worth exercising on the maturity date.
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