# Question

Firm A has a stock price of $40, and has made an offer for firm B where A promises to pay 1.5 shares for each share of B, as long as A's stock price remains between $35 and $45. If the price of A is below $35, A will pay $52.50/share, and if the price of A is above $45, A will pay $67.50/share. The deal is expected to close in 9 months.

Assume σ = 40%, r = 6%, and δ = 0.

a. How are the values $52.50 and $67.50 arrived at?

b. What is the value of the offer?

c. How does the value of this offer compare with that in Problem 16.20?

Assume σ = 40%, r = 6%, and δ = 0.

a. How are the values $52.50 and $67.50 arrived at?

b. What is the value of the offer?

c. How does the value of this offer compare with that in Problem 16.20?

## Answer to relevant Questions

The strike price of a compensation option is generally set on the day the option is issued. On November 10, 2000, the CEO of Analog Devices, Jerald Fishman, received 600,000 options. The stock price was $44.50. Four days ...Repeat the previous problem for debt instead of equity. Verify the binomial calculations in Figure 17.3. Repeat Problems 17.17 and 17.18 assuming that the annual volatility of gold is 20%. Consider the widget investment problem of Section 17.1 with the following modification. The expected growth rate of the widget price is zero. (This means there is no reason to consider project delay.) Each period, the widget ...Post your question

0