Calculate the return from both up-state and the down-state

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Reference no: EM133931389

Assignment:

BuildCorp owns a plot of land in Barangaroo and is considering building apartments on the land. The building would cost $115 million to build. BuildCorp estimates that similar buildings would be worth approximately $110 million today. Current demand for residential property is uncertain due to the current economic circumstances resulting from the aftermath of Covid-19 and economic instability. If the economy improves, the building could be worth $130 million in a year from today. If the economy worsens, the building could be worth $90 million in a year from today. BuildCorp can borrow at 5%.

Rather than constructing the building themselves, BuildCorp has received an offer from another developer who wants to construct office buildings and is willing to pay BuildCorp a fee of $9 million.

a) Calculate the return from both the up-state and the down-state. Show your workings.

b) Calculate the risk-neutral probability. Show your workings.

c) What is the risk-neutral expected payoff?

d) Should BuildCorp accept the offer? Why?

Reference no: EM133931389

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