Revised Shockley, Chapter 5 Answers:
Problem 1:
Problem 2:
The answers are calculated using state prices, but equivalent answers can be found using
Problem 3:
( )
5683.100.1*%45exp ==U
Tree:
1997
1999
2000
15.683
38.574
60.496
15.683
24.596
10.000
Option Value using Tree:
1997
1999
2000
5.750
22.252
41.849
Problem 4:
Based on the values for U, D, and p calculated in the previous problem (there will be
some rounding error)
Problem 5:
Economy:
Competitor:
Probability:
Cash Flow:
Good
Yes
60%*30% = 18%
$30 million
Good
60%*70% = 42%
$50 million
Poor
Yes
40%*30% = 12%
$10 million
Poor
40%*70% = 28%
$15 million
c.
Economy:
Competitor:
Probability:
Return:
Good
Yes
60%*30% = 18%
$30/19.3545 – 1 = 55.00%
Good
60%*70% = 42%
$50/19.3545 – 1 = 158.34%
Poor
Yes
40%*30% = 12%
$10/19.3545 – 1 = -48.33%
Poor
40%*70% = 28%
$15/19.3545 – 1 =-22.50%
0.669
1.536
3.526
8.092
18.574
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
Expected 3 year holding period return:
Variance of 3 year holding period return:
Standard Deviation of 3 year holding period return:
Problem 6:
Year 0:
Year 1:
Year 2:
Year 3:
Option Value:
Year 0:
Year 1:
Year 2:
Year 3:
Problem 7:
Year 0:
Year 1:
Year 2:
Year 3:
Option Value:
Year 0:
Year 1:
Year 2:
Year 3:
The project should still not be developed.
Problem 8:
Economy:
Competitor:
Probability:
Cash Flow:
Good
Yes
20%*30% = 6%
$40 million
Good
20%*70% = 14%
$60 million
Average:
Yes
50%*30% = 15%
$25 million
Average:
50%*70% = 35%
$40 million
Poor:
Yes
30%*30% = 9%
$10 million
Poor:
30%*70% = 21%
$12 million
Problem 9:
Economy
:
Competitor:
Probability:
Cash Flow:
Return:
Good
Yes
20%*30% = 6%
$40 million
40 / 9.7517 – 1 = 310.18%
Good
20%*70% = 14%
$60 million
60 / 9.7517 – 1 = 515.28%
Average:
Yes
50%*30% = 15%
$25 million
Average:
50%*70% = 35%
$40 million
40 / 9.7517 – 1 = 310.18%
Expected 8 Year Return:
Variance of 8 Year Return:
Problem 10:
( )
8161.100.1*%67.59exp ==U
8U0D = $1.00*(0.3874)8*(1 – .3874)0*1 ÷ (1 + 4%)8 = $0.00037
Problem 11:
Option Payoffs:
All other payoffs will be zero.