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1. A stock price is currently $50. It is known that at the end of 1 month it will be either $52 or $48. The risk-free interest rate is 8% per annum with continuous compounding. What is the value of a 1-month European call option with a strike price of $49?
2. A stock price is currently $60. You predict that at the end of 6 months stock price will increase or decrease by 20%. The risk-free interest rate is 10% per annum with continuous compounding. What is the value of a 6-month European put option with a strike price of $60?
3. A stock price is currently $90. Over each of the next two 6-month periods it is expected to go up by 10% or down by 10%. The risk-free interest rate is 8% per annum with continuous compounding. What is the value of a 1-year European call option with a strike price of $90?
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Expected cash dividends are $2.50, the dividend yield is 6%, flotation costs are 4% of price, and the growth rate is 3%. Compute cost of new common stock.
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