The Circle's stock is currently traded at 15. In each quarter, its price can increase by...

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The Circle's stock is currently traded at €15. In each quarter, its price can increase by 25% or decrease by 20%. It is also known that the quarterly risk-free interest rate is 4%. Under these circumstances, what is the current value of a call option with an exercise price of €17 and expiration in six months. Use the two-stage binomial method. 2- The Circle developed an innovative technology to profile their users such that ads could be better fitted to each one. The implementation of this technology costs €70 million. This amount will remain constant in the years to come. If implemented, sales will increase by €10.5 million per year, in perpetuity. The respective costs will increase by €6.6 million per year, also in perpetuity. Assume that the cost of capital and the risk-free rate are both 4% per year. However, this innovative technology incorporates some degree of risk. Actually, in one year, sales will be either €15 million or €8 million with equal probability. Calculate the expected NPV (in millions) of the project if it is postponed by one year. (Ignore taxes) The Circle's stock is currently traded at €15. In each quarter, its price can increase by 25% or decrease by 20%. It is also known that the quarterly risk-free interest rate is 4%. Under these circumstances, what is the current value of a call option with an exercise price of €17 and expiration in six months. Use the two-stage binomial method. 2- The Circle developed an innovative technology to profile their users such that ads could be better fitted to each one. The implementation of this technology costs €70 million. This amount will remain constant in the years to come. If implemented, sales will increase by €10.5 million per year, in perpetuity. The respective costs will increase by €6.6 million per year, also in perpetuity. Assume that the cost of capital and the risk-free rate are both 4% per year. However, this innovative technology incorporates some degree of risk. Actually, in one year, sales will be either €15 million or €8 million with equal probability. Calculate the expected NPV (in millions) of the project if it is postponed by one year. (Ignore taxes)

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SOLUTION 1 Using the twostage binomial method we can calculate the value of the call option as follows First we need to calculate the stock price at t... View the full answer