The current price of Pineapple stock is $50. In each of the next two years, this stock
Question:
The current price of Pineapple stock is $50. In each of the next two years, this stock price can either go up by $12 or go down by $7. The stock pays no dividends. The oneyear risk-free interest rate is 5% and will remain constant.
i. Using the Binomial Model, calculate the price of a two-year put option on Pineapple stock with a strike price of $50.
ii. Using the Binomial Model, calculate the price of a two-year call option on Pineapple stock with a strike price of $51.
c. Superwoman Corp just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, Superwoman's dividends were expected to grow at a 3% rate, and its share price was $50. With the new expansion, Superwoman's dividends are expected to grow at a 5% rate.
i. What share price would you expect after the announcement? (Assume Superwoman's risk is unchanged by the new expansion.
ii. Is the expansion a positive NPV investment?
iii. How would a change in risk affect your answer?