esYou are in discussions to purchase an option on an office building with a strike priceof $56 million. The building is currently valued at $52 million. The option will allow youto purchase the building either six months from today or one year from today. Sixmonths from today, accrued rent payments from the building in the amount of$970,000 will be made to the owners. If you exercise the option in six months, you willreceive the accrued rent payment; otherwise, the payment will be made to the currentowners. A second accrued rent payment of $970,000 will be paid one year fromtoday with the same payment terms. The standard deviation of the value of thebuilding is 45 percent and the risk-free rate is an annual percentage rate of 4.8percent. What is the price of the option today using a two-state model with six-monthsteps? (Hint: The value of the building in six months will be reduced by the accruedrent payment if you do not exercise the option at that time.) (Do not roundintermediate calculations and enter your answer in dollars, not millions of dollars,rounded to the nearest whole number, e.g., 1,234,567.)Price of the option today

A call option is a financial contract that gives the holder (buyer) the right, but not the…

Answered: Price of the option today

Business

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Price of the option today

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Assume that you are about to sell property (a vacant parcel of real estate) you own but otherwise have no use for. The net-of-sales- commission selling price for the property is $450,000. You are willing to finance this transaction over a 14-year period and have told the buyer that you expect a 11% pretax return on the transaction. The buyer has asked you for a payment schedule under several alternatives. Required: 1. What will be your periodic cash receipt, to earn a 11% return, if payments are received from the purchaser: NOTE: to answer the above questions, use the PMT function in Excel, as follows: PMT(rate,nper, pv,fv,type) where: rate is the interest rate for the loan, nper is the total number of payments, pv is the present value (i.e., the total amount that a series of future payments is worth now; also known as the principal), fv is the future value (or a cash balance you want to attain after the last payment is made; if fv is omitted, it is assumed to be 0 (zero)), and type is…
Assume that you are about to sell property (a vacant parcel of real estate) you own but otherwise have no use for. The net-of-sales- commission selling price for the property is $470,000. You are willing to finance this transaction over a 19-year period and have told the buyer that you expect a 9% pretax return on the transaction. The buyer has asked you for a payment schedule under several alternatives. Required: 1. What will be your periodic cash receipt, to earn a 9% return, if payments are received from the purchaser: NOTE: to answer the above questions, use the PMT function in Excel, as follows: PMT(rate,nper.pv.fv.type) where: rate is the interest rate for the loan, nper is the total number of payments, pv is the present value (ie.. the total amount that a series of future payments is worth now, also known as the principal), v is the future value (or a cash balance you want to attain after the last payment is made; if fvis omitted, it is assumed to be 0 (zero)), and type is the…
Cool Brews is looking to expand it's brewpub empire with a new location. The building that Cool Brews is considering purchasing requires mortgage financing with $52,500 payments due at the end of each month for the next 15 years. Additionally, the company will pay $7,500 at the beginning of each month for various costs of ownership such as property taxes and insurance. Determine the cost of the building for Cool Brews assuming an applicable interest rate of 7%. There may be up to $2,000 difference due to rounding. Group of answer choices $19,031,605 $6,681,884 $6,705,760 $834,638 $10,800,000
A buyer is considering purchasing a 10-acre parcel in Peoria, Arizona for economic development. The parcel has a sales price of $720,000. The buyer agrees with the seller for purchasing the property with 15% down up front and paying off the balance in 12-months. If a bank is willing to provide 3% annual interest, compounded monthly, how much should the monthly deposit be into that account to pay off the desired balance to the seller?
You are considering an option to purchase or rent a single residential property. You can rent it for $2,000 per month and the owner would be responsible for maintenance, property insurance, and property taxes. Alternatively, you can purchase this property for $200,000 and finance it with an 80 percent mortgage loan at 4 percent fixed-rate interest that will fully amortize over a 30-year period. The loan requires monthly payments. The loan can be prepaid at any time with no penalty. You have done research in the market area and found that (1) properties have historically appreciated at an annual rate of 2 percent per year, and rents on similar properties have also increased at 2 percent annually; (2) maintenance and insurance are currently $1,500.00 each per year and they have been increasing at a rate of 3 percent per year; (3) you are in a 24 percent marginal tax rate and plan to occupy the property as your principal residence for at least four years; (4) the capital gains exclusion…
Today is 1 July 2021. You are looking to purchase an investment property today (after months of research and negotiations). You have spoken to Peter, the loan specialist at Harrison Bank, to negotiate the terms of your mortgage. You and Peter have agreed to the following terms: You will borrow $390,000 today in order to purchase your chosen property. This mortgage will be repaid by level monthly repayments. Your first repayment to the bank will occur exactly 1 month from today, on 1 August 2021, and the final repayment will occur exactly 27 years from today, on 1 July 2048. Peter has arranged for an interest rate of 7.4% p.a. effective to be locked in for the life of this loan. c) Calculate the equivalent effective monthly rate. Give your answer as a percentage to 4 decimal places
Emerson developed a new style of camping trailer. He is considering a licensing agreement with Easy-Tow, who will manufacture the new trailer. They are proposing to pay him $36,000 now, and $18,000 at the beginning of each of the eleven years of the licensing agreement, starting in two years. If interest is 5.35% compounded semi-annually, what is the agreement worth today? The agreement is worth $ today. (Round the final answer to the nearest cent as needed. Round all intermediate values to six decimal places as needed.)
A real estate investor holds a time-payment investment contract on his shares in a piece of land. The contract calls for the payment of $1,400 at the end of each month for a six-year period. The first payment is due in one month. The investor offers to sell you the contract for $68,000 cash today. If you can otherwise make 1% per month on your money, would you accept or reject the investor's offer? Select one: a. No, you will pay $112.6 extra per month b. Yes, you will pay $556.22 less per month C. No, you will pay $85.37 more per month d. Yes, you will pay $70.58 less per month e. Can not take a decision
Bill is assessing an investment in one of two studio apartments in Sydney’s Potts Point as rental properties for a 3-year time frame. Each property requires an initial outlay of $200,000 and would be sold at the end of 3 years. Bill expects that at this time he could sell property A for $300,000 and property B for $280,000. He also anticipates an increase in net rental income each year for each property. Property B is older but because of its excellent location he expects to achieve a higher net rental even though its expected sales price is likely to be a bit lower than property B. If Bill did not want to invest in either of the two properties then he would invest the $200,000 in a managed fund of equivalent risk which is expected to pay a rate of return of 7% p.a. The expected net income flows for both properties is shown below: Year 1 Year 2 Year 3 Property A $10,000 $10,250 $10,500 Property B $11,000…
An investor is considering buying an apartment complex for $2,000,000 that has a projected year one NOI of $140,000 and the NOI is expected to increase three percent annually. The investor intends to hold the property five years, sell it for a price calculated by capitalizing the sixth year NOI at seven percent (round the sale price to the nearest $1,000), and incur a cost of sale of four percent of the projected sale price. The tax assessor shows the improvements to be 80 percent of the total value. The investor's marginal tax rate is 37 percent, capital gains rate is 20 percent, and cost recovery recapture rate is 25 percent. What is the "Without Financing/After Tax” Internal Rate of Return (rounded to nearest whole percent? O 7 percent 8 percent 9 percent 10 percent
An investor anticipates that land values for a site will be worth $150,000 in five years. Assume real estate taxes are expected to be $2,000 each year (paid at the end of each year) for the next five years and the investor can rent the parcel for $2,400 per year to a billboard company (also paid at the end of each year). How much can the investor pay today for the site and still earn a 15 percent annual return on his investment?
The owner of a local restaurant needs to decide between two lease options as presented below for the next 3 years. Option 1: A fixed fee of 540,000 plus 4% of the total sales. Option 2: Afixed fee of 560,000 plus 2% of the total sales. The business is recently crated, and the owner's projected sales will reach 5700,000 in the third year: and it will grow by 10% per year for the next several years. Which one of the following would you recommend, and why? - More information is neede a to solve for the answer Either option does not make differrece because the amount of revenues 25 51,000,000 is the Indifference Pont. Phis it doesn't matter Select the Oation I for the neast 3 yearse and renew the lease contract in thie fourth yor wili De kution 2 Select the Ostion 2 for the first 3 years, and switch it to the Opeis a The theoretina

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