An option that gives the holthe right to sell a stock at a specified price at some future time:

Question

Robert · Accepted Answer

Part I: 
1. Stock Price = Expected Dividend next year / (Required rate of return – Growth rate) 
=> $0.75 / (0.105 – 0.064) = $18.29
2. Since the growth is constant, stock price will also grow by same rate. So, the stock price will be: 
=> $35.25 x (1.0475)
5
 = $44.46
3. A put option gives its buyer a right to sell at strike price and creates an obligation for its buyer to 
buy the underlying, in case the buyer wishes to exercise his/her right.
4. Option’s time to maturity
5. Put-Call Parity Formula: 
C + [X / (1+r)
t
] = S0 + P 
C = Call Premium = $7.20 
X = Strike Price of Call & Put = $55 
r = Interest rate = 6% 
t = Time in years = 1 year  
S0 = Spot price of the underlying = $50 
P = Put Premium = ? 
 $7.20 + [$55 / (1+.06)
1
] = $50 + P 
 P = $7.20 + $51.88 - $50 = $9.08 or $9.00
6. Cost of equity as per CAPM = Rf + Beta*(RPm) 
=> 5% + 1.05*(6%) = 11.30%
7. Stock Price = Expected Dividend next year / (Cost of equity – Growth rate) 
=> $27.50 = $0.67 / (Cost of equity – 0.08) 
=> Cost of equity = ($0.67/$27.50) + 0.08 = 0.104363636 or 10.44%
8. WACC = (Weight of Common Stock x Cost of Common Stock) + (Weight of Preferred Stock x Cost 
of Preferred Stock) + (Weight of Debt x Cost of Debt) 
=> (0.45 x 0.1275) + (0.15 x 0.075) + (0.40 x 0.06) = 0.092625 or 9.26%
9.

An option that gives the holthe right to sell a stock at a specified price at some future time:

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