A One-Year European Call Option on ABX Corporation with a Strike

question 24

Multiple Choice

A one-year European call option on ABX corporation with a strike price of $50 is currently trading for $1.45,and a one-year European put option on ABX with the same strike price is currently trading for $6.22.If the stock pays a one-time dividend of $1.50 in exactly 6 months,and the risk-free rate is 8% per year,what is the current price of ABX stock?

• A)$42.97
• B)$43.03
• C)$49.63
• D)$52.53
• E)$55.41

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Definitions:

Retained Earnings

The portion of a company's profit kept in the business after dividends are paid, which can be used for reinvestment in operations, debt reduction, or other purposes.

Component Cost Of Preferred Stock

The required rate of return by investors on a company's preferred stock, essentially the cost to the company of issuing preferred stock.

Dividend Yield

The financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

After-Tax Cost Of Debt

The net cost to a company for borrowing funds, calculated by subtracting the tax savings from the cost of debt's interest payments.