What Is the Difference in the Expected Returns on Equity

question 12

Multiple Choice

What is the difference in the expected returns on equity when using a Black-Scholes formula versus a traditional weighted average formula? Assume r_A = 0.12, r_f = 0.06, asset value = $170, equity value = $45, debt to value ratio = 0.55, and delta = 0.6500.

• A) 1.00%
• B) 1.20%
• C) 1.40%
• D) 1.60%

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Definitions:

Variance

Variance is a statistical measure that represents the degree of spread in a data set. It is calculated as the average of the squared differences from the Mean.

Fraction

A numerical quantity representing a part of a whole, typically expressed as a ratio of two integers.

Interval

A range between two points or numbers, often used to specify a particular segment of a scale or measurement.

Mean

A measure of central tendency calculated by summing all the values in a dataset and dividing by the number of values.