An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc.

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June 7th, 2024

1) An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data:The price of the stock is $45.The strike price of the option is $40.The option matures in 6 months (t = 0.5).The standard deviation of the stock’s returns is 0.50, and the variance is 0.25.The risk-free rate is 5%.Using the Black-Scholes model, what is the value of the call option?2)The CFO of Lenox Industries hired you as a consultant to help estimate its cost of common equity. You have obtained the following data: (1) rd = yield on the firm’s bonds = 7.00% and the risk premium over its own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = $1.20, P0 = $35.00, and g = 8.00% (constant). You were asked to estimate the cost of common based on the three most commonly used methods and then to indicate the difference between the highest and lowest of these estimates. What is that difference?

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