Question

The stock price of XYZ is $100. One million shares of XYZ (a negligible fraction of the shares outstanding) are buried on a tiny, otherwise worthless plot of land in a vault that would cost $50 million to excavate. If XYZ pays a dividend, you will have to dig up the shares to collect the dividend.
a. If you believe that XYZ will never pay a dividend, what would you pay for the land?
b. If you believe that XYZ will pay a liquidating dividend in 10 years, and the continuously compounded risk-free rate is 5%, what would you pay for the land?
c. Suppose that XYZ has a 1% dividend yield and a volatility of 0.3. At what price would you excavate and what would you pay for the land?


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  • CreatedAugust 12, 2015
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