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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

OPTIONS The exercise price on one of Boudreaux Company's call options is $14, its exercise value is $20, and its premium is $5. What are the option's market value and the stock's current price?

Summary Introduction

To determine: The current price of the stock and market value of the option.

Introduction:

Option is a contract to purchase a financial asset from one party and sell it to another party on an agreed price for a future date.

Explanation

Given information:

B Company has a call option stock with an exercise price of $14 and its exercise value is $20. The premium is $5.

The formula to compute the market price of option using premium formula is as follows:

Premium  =Market price of optionExercise value

The formula to compute the current stock price of option using exercise value formula is as follows:

Exercise value =Current stock priceExercise price

Compute the current stock price of option:

Exercise value =Current stock priceExercise price$20=Current stock price$14

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