5. Option pricing -Single-period binomial approach Aa AaE The value of an option can be calculated by using a step-by-step approach in the case of single periods or by using sophisticated formulas that can be easily created through a spreadsheet. In the real world, two possible outcomes for a stock price in six months is an assumption. The stock markets are volatile, and stocks move up and down based on market- and firm-specific factors. Consider the case of Toronto Cell Inc. Shares of Toronto Cell Inc., a manufacturer of cell phones, sell for $30.00. Existing options allow for the option holder to purchase one additional share at an exercise price of $25.00. (Assume that you get the option for free!) The option will expire within one year. Assume that at that time there will be an 80% chance that Toronto Cell Inc. shares will sell for $45.00 and a 20% chance that the shares will be selling at $20.00. Using the steps to the binomial approach, determine the following: The expected end-term share price and return on Toronto Cell Inc.shares are: $40.00 and 33.3% $47.60 and 19.5% $36.00 and 46.3% $44.00 and 22.1% Based on the binomial approach, the range of payoff values at expiration for T and options O $28.00 (share) and $26.00 (option) O $25.00 (share) and $20.00 (option) O $15.00 (share) and $35.00 (option) $25.00 (share) and $45.00 (option)