Consider the information in Table 2 about an investment opportunity that can be deferred for one...

 

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Consider the information in Table 2 about an investment opportunity that can be deferred for one year: Expected cash flow (CF) year 1 g-perpetuity growth rate of CF k-cost of capital K-investment cost a-standard deviation of CF r-risk-free rate 6-opportunity cost Table 2 75 million 1.5% 10% 980 million. 20% 2% 7% To answer the following questions, make plausible assumptions if necessary. In case you prefer, standard characters can be used (e.g., s rather than o, capital sigma rather than ). a. What is the value of this investment opportunity using the Black-Scholes (B-S) formula for a European call option? Explain your answer. For your computations, use as inputs for the cumulative probability from the normal distribution (d) 0.2499 and N(dz) = 0.1908. Present your result rounded to one decimal place. = [12.5 marks] b. Consider the following statement with respect to the investment opportunity under analysis: "The net present value of the investment opportunity is negative. Therefore, the investment opportunity should be rejected". Do you agree with this statement? Explain your answer. Consider the information in Table 2 about an investment opportunity that can be deferred for one year: Expected cash flow (CF) year 1 g-perpetuity growth rate of CF k-cost of capital K-investment cost a-standard deviation of CF r-risk-free rate 6-opportunity cost Table 2 75 million 1.5% 10% 980 million. 20% 2% 7% To answer the following questions, make plausible assumptions if necessary. In case you prefer, standard characters can be used (e.g., s rather than o, capital sigma rather than ). a. What is the value of this investment opportunity using the Black-Scholes (B-S) formula for a European call option? Explain your answer. For your computations, use as inputs for the cumulative probability from the normal distribution (d) 0.2499 and N(dz) = 0.1908. Present your result rounded to one decimal place. = [12.5 marks] b. Consider the following statement with respect to the investment opportunity under analysis: "The net present value of the investment opportunity is negative. Therefore, the investment opportunity should be rejected". Do you agree with this statement? Explain your answer.