You own a small networking startup. You have just received an offer to buy your firm...

You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. JCH stock currently trades for $25.63 per share. You can sell the shares of JCH that you will receive in the market at any time. But as part of the offer, JCH also agrees that at the end of one year, it will buy the shares back from you for $25.63 per share if you desire. Suppose the current one-year risk-free rate is 5.95%, the volatility of JCH stock is 29.4%, and JCH does not pay dividends. Round all intermediate values to five decimal places as needed.

a. Is this offer worth more than $25.63 million? Explain.

b. What is the value of the offer?

Expert Solution

Is this offer worth more than $25.63 million? Explain.

Yes, this offer is worth more than $25.63 million

Current value of stocks = 1 million * $25.63 = $25.63 million

And risk free interest rate is 5.95%; therefore if you will sell the shares today and invest it at risk free rate then it’s worth more than $25.63 million

What is the value of the offer?

Value of offer price can be calculated with Black-Scholes model’s call option

INPUTS		Outputs	Value
Standard deviation (Annual) σ	29.40%	d1	0.3494
Expiration (in Years) T	1.00	d2	0.0554
Risk free rates (annual) r	5.95%	N(d1)	0.6366
Current Value of stocks (S)	$25,630,000.00	N(d2)	0.5221
Future value of stocks or Strike price (K)	$25,630,000.00	B/S call Price	3707985.33
Dividend yield (annual)	0

The value of the offer is the call price = $3,707,985.33

Formulas used in excel calculations:

jeff jeffy answered 3 months ago

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You own a small networking startup. You have just received an offer to buy your firm...

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