One of Modular Products (MP)customers Would Like to Obtain a 6-Month

question 34

Multiple Choice

One of Modular Products (MP) customers would like to obtain a 6-month option to purchase 500,000 tables for $119 each.These tables currently sell for $110 each.Assume u equals 1.0994 and d equals .9096.What price should MP charge for this option if the annual risk-free rate is 3.2 percent? Round your answer to the nearest $100.

• A)$338,400
• B)$421,900
• C)$598,100
• D)$479,900
• E)$533,600

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Definitions:

Discount Rate

The interest rate used in discounted cash flow forecasts to decipher the present value of prospective cash flows.

Present Value

Today’s fiscal equivalent of money anticipated in the future or sequences of cash inflows, discounted using a specified rate of return.

Today's Dollars

Refers to the value of money in terms of the purchasing power of the current year, accounting for inflation.

Compounding Effect

The compounding effect refers to the process where the value of an investment increases due to the earnings on both the initial principal and the accumulated earnings from preceding periods.