Some years ago the Australian firm Bond Corporation sold a share in some land that it owned

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Some years ago the Australian firm Bond Corporation sold a share in some land that it owned near Rome for $110 million and as a result boosted its annual earnings by $74 million. A television program subsequently revealed that the buyer was given a put option to sell its share in the land back to Bond for $110 million and that Bond had paid $20 million for a call option to repurchase the share in the land for the same price.

a. What happens if the land is worth more than $110 million when the options expire?

What if it is worth less than $110 million?

b. Use position diagrams to show the net effect of the land sale and the option transactions.

c. Assume a one-year maturity on the options. Can you deduce the interest rate?

d. The television program argued that it was misleading to record a profit on the sale of land. What do you think?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
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Principles of Corporate Finance

ISBN: 978-0077404895

10th Edition

Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen

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