Blackberry does not plan to pay dividends in the next year

Assignment Help Financial Management

Reference no: EM131864977

A friend of your believes that BlackBerry stock is now overvalued. As a result, she expects that their stock price, now at $14 per share, will not go up any further. She is prepared to back up her conviction by offering you the following bet. If in exactly one year from now Blackberry stock price is higher than $14/share, she will give you two hundred times the amount of the difference (e.g., suppose the price in one year is $16 per share, you will get $400). On the other hand, if the price in one year ends up below $14/share, you will have to give her two hundred times the amount of the difference (e.g., suppose the price in one year is $11 per share, you will have to give her $600). Suppose that the expected return on Blackberry stock is 7% p.a. Suppose also that the current risk-free rate is 2% p.a. and Blackberry does not plan to pay dividends in the next year. What is the value of this bet to you? [Hint: Write out the payoff of the bet. What does the payoff look like?]

Reference no: EM131864977

Questions Cloud

Company proceed with the development of the product : Should the company proceed with the development of the product if the discount rate is 20? Why or why not?

Prepare the stockholders equity section of balance sheet : Prepare the stockholders' equity section of the balance sheet at December 31, 2014, using this select information.

Difference in NPVs between the Make and Buy options : Calculate the difference in NPVs between the Make and Buy options. Express all costs as positive values in your calculations.

Fixed asset are depreciated using straight-line depreciation : Fixed assets are depreciated using straight-line depreciation over the project's life. What is the financial break-even point?

Blackberry does not plan to pay dividends in the next year : Suppose also that the current risk-free rate is 2% p.a. and Blackberry does not plan to pay dividends in the next year. What is the value of this bet to you?

The annual operating cash flow is projected : In other words, the annual operating cash flow is projected to be $67x5,300=$355,100.

A bond which has deferred call : A bond which has a deferred call

The firm is currently operating at full capacity : Assume all assets and current liabilities change spontaneously with sales and the firm is currently operating at full capacity.

What is tracy and brett current ratio : What is Tracy and Brett's current ratio?

User Account

All Pages