Question

In: Finance

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 $24.63 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 $24.63 per share if you desire. Suppose the current one-year risk-free rate is 5.73%, the volatility of JCH stock is 30.5%, and JCH does not pay dividends. Round all intermediate values to five decimal places as needed.

a. Is this offer worth more than $24.63 million? Explain.

b. What is the value of the offer?

Expert Solution

a) The offer consists of 2 parts.

1) One is the value of 1 million shares at current market price ($24.63). This translates to $24.63 millions

2) The second part is a put option to sell these shares at $24.63 after one year. This is essentially a put option.

We know that the value of a put option can never be less than zero. The value of the offer is

$24.63 million +V, where V is the value of option and V is greater than or equal to zero.

Hence, the offer is worth more than $24.63 millions

b) Now we need to calculate the value of put option. We use any option calculator (available online) and plug in following values

The value of put option comes out to be $2.26705. WE need to multiply it by 1 million as there are 1 million shares

= $2.26705 million

Hence the total value of offer is $24.63+$2.26705 = $26.89705 millions.

NOTE: We can also calculate the value of put option ourselves by using the Black-Scholes formula formulas but it will be very lengthy process.

Kindly let me know if you have any doubt.
Don't forget to rate the answer if you found my effort helpful :)

jeff jeffy answered 1 year ago

You are an advisor of a startup that just received an investment of $100,000. You expect...

You are an advisor of a startup that just received an investment of $100,000. You expect the company is in the ‘valley of death’ stage of its life cycle. Provide them with high level advice on how they should use the capital and explain your reasoning.

You are the CFO of a small startup company. You have just completed a six-month cash...

You are the CFO of a small startup company. You have just completed a six-month cash flow forecast and determined that the company will incur a one-month negative cash flow, two months from now. What specific policy actions can you undertake with your working capital accounts to help mitigate this expected shortfall? Outline the specific working capital actions that you recommend taking to mitigate the cash flow problem. make sure the action can be implemented in the period required.

You have just received a job offer at an investment bank, an dare offered the 2...

You have just received a job offer at an investment bank, an dare offered the 2 salary options.Both are for 2 years, with the salary to be paid in equal amounts at the end of the month. Option 1 is $75,000 per year for 2 years. Option 2 is $64,000 per year for 2 years, and a signing bonus of $20,000 to be paid immediately. The appropriate interest rate is 7% per year. Which option should you choose. Please show...

Your firm designs training materials for computer training classes, and you have just received a request...

Your firm designs training materials for computer training classes, and you have just received a request to bid on a contract to produce a complete set of training manuals for an 8-session class. From previous experience, you know that your firm follows an 85% learning rate. For this contract, it appears that the effort will be substantial, running 50 hours for the first session. Your firm bills at the rate of $100/hour and the overhead is expected to run a...

Welbilt is negotiating to lease small trailers with Delta Leasing. The firm has received an offer...

Welbilt is negotiating to lease small trailers with Delta Leasing. The firm has received an offer from Wells Cargo for a total purchase price of $1,100,000. The terms of the lease include four payments of $290,000, with each payment occurring at the beginning of the year. An alternative to leasing is to borrow the money and buy the trailers. The $1,100,000 loan for four years has an annual interest rate of 8%. Assume the trucks fall into the MACRS 3-year...

Your round-the-world vacation ran over budget. But you’re in luck. You just received an offer to...

Your round-the-world vacation ran over budget. But you’re in luck. You just received an offer to transfer your $15,000 balance from your current credit card, which charges an annual rate of 24 percent, to a new credit card charging 18 percent. How much faster could you pay off the loan by making your planned monthly payments of $500 with the new card? Note: assume monthly compounding.

Your firm employs 10 employees. You have just signed a new contract to construct a small...

Your firm employs 10 employees. You have just signed a new contract to construct a small store in a local city. However, due to the coronavirus pandemic, you are experiencing supply chain problems relative to your raw materials. Discuss in detail how you would approach this problem.

You have just been approached by a magazine with an offer for renewing your subscription. You...

You have just been approached by a magazine with an offer for renewing your subscription. You can renew for one year at $20, two years for $36, or three years at $45. Assuming that you have an opportunity cost of 20% and the cost of a subscription will not change over time, which of these three options should you choose? A) 1 year at $20 B) 2 years at $36 C) 3 years at $45

Imagine you have just taken over a small tax accounting firm where you find out your...

Imagine you have just taken over a small tax accounting firm where you find out your employees are lazy and sloppy in their work. Describe the leadership techniques you would use to correct this. Show the steps of the process you would recommend.

Problem 39: You have just turned 30 years old, have just received your MBA, and have...

Problem 39: You have just turned 30 years old, have just received your MBA, and have accepted your first job. Now you must decide how much money to put into your RRSP. Your RRSP works as follows: Every dollar in the plan earns 7% per year. You cannot make withdrawals until your 65th birthday. After that point, you can make withdrawals as you see fit. You decide that you will plan to live to 100 and work until you turn...