B2-M7

Question 1

Options

Answer 1

contract that entitles owner to buy (call) or sell (put) a stock at a given price within a stated period

• American style: can be exercised any time
• European style: can be exercised only @ maturity

Question 2

The Black-Sholes model

Answer 2

-option valuation
-Assumptions:
random behavior of stock prices, no taxes or transaction costs, stock pays no dividends, european style

Question 3

Binomial method

Answer 3

• variation of black-sholes model but considers stock over period of time
• useful for american style options and consideration of option
• used for stock that pays dividends

Question 4

Net realizable method (Liquidation Valuation)

Answer 4

The amount a company could get upon sale (minus associated fees)

Question 5

Cost approach valuation

Answer 5

• cost or replacement cost or reproduction cost

- used when no reasonable estimates of income and no mkt data

Question 6

Income approach

Answer 6

• future expected cash flows over expected life discounted to PV
• cost minus depreciation