Use a Binomial Tree to Value to Following Option

question 21

Multiple Choice

Use a binomial tree to value to following option.Assume rf = 0.045,r_p = 0.14,σ = 0.20,E(CF₁) = $62 million,g = 0.03,time horizon = 2 years,binomial period = 1 year,and cost = $500 million.What is the value of this project option?

• A) $47 million
• B) $57 million
• C) $67 million
• D) $77 million

---

Definitions:

Cost of Capital

The cost of funds used for financing a business, represented by the interest rate paid on debt or the rate of return required by equity investors.

Capital Tied

Refers to the amount of money invested in assets or inventory that is not readily available for use in other areas of the business.

Inventory

The total amount of goods, materials, and products held by a company to support production, fulfill customer orders, and maintain operations.

Fixed Quantity

A set amount of an item or resource that does not vary or change over time.