Problem 1) What is the value of a 9-month call with a strike price of $45 given the Black-Scholes Option Pricing Model and the following information?
Stock price $48
Exercise price $45
Time to expiration .75
Risk-free rate .05
N(d1) .718891
N(d2) .641713
Problem 2) Chandler Communications' CFO has provided the following information:
- The company's capital budget is expected to be $5,000,000.
- The company's target capital structure is 70 percent debt and 30 percent equity.
- The company's net income is $4,500,000.
If the company follows a residual distribution policy (with all distributions in the form of dividends), what portion of its net income should it pay out as dividends this year?