$1.$ What is an option?

$2.$ How do the following factors affect the call price? Assuming the value of each of the following increases, what would be the effect on the value of the call $($increase or decrease$)?$

Stock price

Exercise price

Time to maturity

Volatility

$3.$ How does an option$$s intrinsic value differ from its time value?

$4.$ Is the MRAM growth option comparable to a financial option? If so$,$ how?

$5.$ How much would the MRAM growth option have to be worth to make it worthwhile to invest in RamSync?

$6.$ With the data as given, what is the value of the MRAM growth option?

$7.$ Assuming you believe volatility can affect the value of the call option, what would be the value of the MRAM growth option if the expected volatility were $50\%?$ How about $75\%?$ In each case, assume all other values remain the unchanged.

Value of Call Option with $50\%$ volatility

Value of Call Option with $75\%$ volatility

$8.$ What would be the value of the MRAM growth option if the expected value of the MRAM market was $$300$ million? $$120$ million? $$100$ million? In each case, assume all other values remain the unchanged.

Value of Call if value of MRAM market $=$ $$300$

Value of Call if value of MRAM market $=$ $$120$

Value of Call if value of MRAM market $=$ $$100$

MRAM

Risk$-$free rate $6\mathrm{.}00\%$

Levered Beta $1\mathrm{.}4$

Market Premium $5\mathrm{.}50\%$

Cost of Equity $13\mathrm{.}70\%$

Volatility $65\%$

Cost of Debt Financing $15\mathrm{.}00\%$

Tax Rate $38\mathrm{.}90\%$

After$-$Tax Cost of Debt $9\mathrm{.}17\%$

$\%$ LTD $70\%$

$\%$ LTE $30\%$

WACC $10\mathrm{.}53\%$

Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

EBIT $ $11,040\mathrm{.}00$ $ $11,592\mathrm{.}00$ $ $12,172\mathrm{.}00$ $ $12,780\mathrm{.}00$ $ $13,419\mathrm{.}00$

NIWC $ $100\mathrm{.}00$ $ $150\mathrm{.}00$ $ $200\mathrm{.}00$ $ $250\mathrm{.}00$ $ $300\mathrm{.}00$

Depriciation $ $5,000\mathrm{.}00$ $ $5,000\mathrm{.}00$ $ $5,000\mathrm{.}00$ $ $5,000\mathrm{.}00$ $ $5,000\mathrm{.}00$

Capital Expenditure $ $7,000\mathrm{.}00$ $ $7,000\mathrm{.}00$ $ $7,000\mathrm{.}00$ $ $7,000\mathrm{.}00$ $ $7,000\mathrm{.}00$

CF $ $8,940\mathrm{.}00$ $ $9,442\mathrm{.}00$ $ $9,972\mathrm{.}00$ $ $10,530\mathrm{.}00$ $ $11,119\mathrm{.}00$

TV $ $211,155\mathrm{.}00$

DCF $ $8,088\mathrm{.}00$ $ $7,729\mathrm{.}00$ $ $7,385\mathrm{.}00$ $ $7,055\mathrm{.}00$ $ $134,743\mathrm{.}00$

Asset Value $($sum of DCF$)$ $ $165,000\mathrm{.}00$

Initial Investment $ $250,000\mathrm{.}00$

Required Investment $ $265,000\mathrm{.}00$

RFR $6\mathrm{.}00\%$

PV of Exercise Price $ $500,000\mathrm{.}00$

SRAM

Risk$-$free rate $6\mathrm{.}00\%$

Levered Beta $1\mathrm{.}4$

Market Premium $5\mathrm{.}50\%$

Cost of Equity $13\mathrm{.}70\%$

Cost of Debt Financing $10\mathrm{.}00\%$

Tax Rate $38\mathrm{.}90\%$ Volatility $(\backslash$sigma $)65\%$

After$-$Tax Cost of Debt $6\mathrm{.}11\%$

$\%$ LTD $70\%$

$\%$ LTE $30\%$

WACC $8\mathrm{.}39\%$

Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

EBIT $ $67,200\mathrm{.}00$ $ $70,200\mathrm{.}00$ $ $71,200\mathrm{.}00$ $ $71,200\mathrm{.}00$ $ $71,200\mathrm{.}00$

NIWC $ $200\mathrm{.}00$ $ $300\mathrm{.}00$ $ $100\mathrm{.}00$ $ $50\mathrm{.}00$ $ $50\mathrm{.}00$

Depriciation $ $2,500\mathrm{.}00$ $ $2,500\mathrm{.}00$ $ $2,500\mathrm{.}00$ $ $2,500\mathrm{.}00$ $ $2,500\mathrm{.}00$

Capital Expenditure $ $500\mathrm{.}00$ $ $500\mathrm{.}00$ $ $500\mathrm{.}00$ $ $500\mathrm{.}00$ $ $500\mathrm{.}00$

CF $ $69,000\mathrm{.}00$ $ $71,900\mathrm{.}00$ $ $73,100\mathrm{.}00$ $ $73,150\mathrm{.}00$ $ $73,150\mathrm{.}00$

TV $ $871,932\mathrm{.}00$

DCF $ $63,659\mathrm{.}00$ $ $61,201\mathrm{.}00$ $ $57,406\mathrm{.}00$ $ $52,999\mathrm{.}00$ $ $631,735\mathrm{.}00$

Sum of DCFs $ $867,000\mathrm{.}00$

Proposed Cost $ $900,000\mathrm{.}00$