The Current Price of a Stock Is $22, and at the End

question 1

Multiple Choice

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?

• A) $2.43
• B) $2.70
• C) $2.99
• D) $3.29
• E) $3.62

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Definitions:

Stockholders' Equity

Represents the equity stake currently held by all shareholders of a company, calculated as the total assets minus total liabilities.

Working Capital

The distinction between an organization's immediate assets and liabilities, showing its short-term fiscal well-being and effectiveness in operations.

Plant and Equipment

Long-term tangible assets used in the operation of a business, not intended for sale.

Noncurrent Assets

Long-term assets that are not expected to be converted into cash, sold, or consumed within one year or the operating cycle, including property, plant, and equipment.