question 4 (a)
Sir,
I didn't understand how examiner have calculated value of "Pa". Can you explain me how it has been calculated and why examiner have discounted ?????
another thing why examiner didn't discount exercise price "Pe"...."additional expenditure of $15m will incur in 3 year time "
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Mar/Jun 2016 Question 4 (a)
8y ago#1Pa is the value 'now' - i.e. the PV of the future flows.
Since the NPV is zero (per the question), the PV of the future flows must be the same as the PV of the 15M din 3 years time.
The exercise price is effectively being discounted - the part of the formula that multiplies Pe by e^(-rt) is there to discount, but on a continuous basis (and I do mention this in my free lectures).
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