PLS SHOW ALL YOUR WORK AND EXPLAIN YOUR CALCULATIONS AND SOLUTIONS. Chapter 5: T

Question

PLS SHOW ALL YOUR WORK AND EXPLAIN YOUR CALCULATIONS AND SOLUTIONS.

Chapter 5:
Thress Industries just paid a divident of $1.50 a share (ie. D = $1.50). The divident is expected to grow 5% a year for the next 3 years, and then 10% a year thereafter. what is the expected divident per share for each of the next 5 years?

Chapter 6:
A call option on the stock of Bedrock Bolders has a market price of $7. the stock sells for $30 a share, and the option has a strike price of $25 a share. What is the exercise value of the call option? What is the option's time value?

Explanation / Answer

Dividend
It is currently $1.50 and expected to grow by 5%, so using the compounding formula
FV = PV (1 + r)n

Where PV = 1.50, r = 0.05, n = 3

Then after 3 years the dividend should be

FV = 1.50 (1.05)3 = $1.7364

Then compound it further for another yeat at 10%p.a

FV = 1.7364 (1+0.10)1 = $1.9101 approx

Option

If you were to exercise at the current conditions, the stock is $30 more than the call strike price of $25 - hence the exercise value /intrinsic value is 30-25 = $5

An option is made up of intrinsic + extrinsic/time value. From above we know the intrinsic value is $5 and since total cost of the option is $7, this means the $2 difference is the time value.

Time value = $2

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