Question 1: Assuming Google’s stock has an implied volatility of 26.60%, use the Black-Scholes option pricing formula and the market data in the…

Question 2:

Assume that you own a manufacturing business that revenues $390MM a year and has 15% EBIT margin. The net profit margin is 5%.

Your CFO comes into your office suggesting that the company has a celebration due to its financial performance. He says to you: Your business is giving you a return on your investment(i.e. equity) of $19.5MM a year!

Other facts:

Your invested working capital every year amounts to approximately $21MM

Your total Fixed assets are $788MM

Your WACC is at 10.5%

Current Market Risk Free Rate is at 4%

Average return on the stock market over last 10 years 11%

Your business has a Beta of 1.3

Would you agree with your CFO’s perception of the true reality regarding the return on your equity and reasons for a “celebration”?

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