What Is the Expected Return on Equity Using the Black-Scholes

question 4

Multiple Choice

What is the expected return on equity using the Black-Scholes formula,given a zero-coupon bond that pays $250 at maturity in 4 years? Assume assets are worth $200,r = 0.05,σ = 0.30,and no dividend is paid.The return on assets is 11.5%.

• A) 10.27%
• B) 14.27%
• C) 18.27%
• D) 22.27%

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Definitions:

Rational Function

A function represented by the ratio of two polynomials.

Rational Expression

A ratio of two polynomials.

Simplify

The process of reducing an expression or equation to its simplest form, often by combining like terms or applying mathematical operations.

Domain

The set of all possible input values (x-values) for which a given function is defined.