Kanick Corp is evaluating a new venture project and has developed the following decision tree analysis ($M).
Kanick's cost of capital is 12% but a pure play competitor in the new field has been identified with a beta of 1.5. The average stock is returning 14% and treasury bills yield 6%. What is the venture's expected NPV. Discuss its risk characteristics.
Definitions:
Strike Price
The fixed price at which an option's holder has the right to purchase (if a call option) or sell (if a put option) the underlying asset or commodity.
Option Premium
An option premium is the price that a buyer pays to the seller for an options contract, which gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified strike price.
Conversion Price
The predetermined price at which convertible securities can be exchanged for common stock.
Convertible Bond
A type of bond that can be converted into a predetermined number of the issuing company's shares at certain times during its life, usually at the discretion of the bondholder.
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