公司理財精要版原書第12版英文版課件Ross-12e-Ch23

1、CHAPTER 23OPTIONS AND CORPORATE FINANCECopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Lay out the basics of call and put options and explain how to calculate their payoffs and profitsList the factor

2、s that affect option values and show how to price call and put options using no arbitrage conditionsExplain the basics of employee stock options and their benefits and disadvantagesValue a firms equity as a call option on the firms assetsValue options in capital budgeting projects, including timing

3、options, the option to expand, the option to abandon, and the option to contractDefine the basics of convertible bonds and warrants and how to value themCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Educatio

4、n.Key Concepts and SkillsOptions: The BasicsFundamentals of Option ValuationValuing a Call OptionEmployee Stock OptionsEquity as a Call Option on the Firms AssetsOptions and Capital BudgetingOptions and Corporate SecuritiesChapter OutlineCopyright 2019 McGraw-Hill Education.All rights reserved. No r

5、eproduction or distribution without the prior written consent of McGraw-Hill Education.CallPutStrike or Exercise priceExpiration dateOption premiumOption writerAmerican OptionEuropean OptionOption TerminologyCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution wi

6、thout the prior written consent of McGraw-Hill Education.Look at Table 23.1 in the book.Price and volume information for calls and puts with the same strike and expiration is provided on the same line.Things to noticePrices are higher for options with the same strike price but longer expirations.Cal

7、l options with strikes less than the current price are worth more than the corresponding puts.Call options with strikes greater than the current price are worth less than the corresponding puts.Stock Option QuotationsCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distri

8、bution without the prior written consent of McGraw-Hill Education.The value of the call at expiration is the intrinsic value.Max(0, S-E)S is the underlying asset priceE is the exercise priceIf SE, then the payoff is S EAssume that the exercise price is $30.Option Payoffs CallsCopyright 2019 McGraw-H

9、ill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.The value of a put at expiration is the intrinsic value.Max(0, E-S)If SE, then the payoff is 0Assume that the exercise price is $30.Option Payoffs PutsCopyright 2019 McGraw-H

10、ill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Where can we find option prices?On the Internet, of course. One site that provides option prices is Yahoo! Finance.Go to Yahoo! Finance.Enter a ticker symbol, then click on t

11、he options tab to get a basic quote.Work the Web ExampleCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Upper boundCall price must be less than or equal to the stock price.Lower boundCall price must

12、be greater than or equal to the stock price minus the exercise price or zero, whichever is greater (i.e., the options intrinsic value).If either of these bounds are violated, there is an arbitrage opportunity.Call Option BoundsCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction

13、 or distribution without the prior written consent of McGraw-Hill Education.Figure 23.2Copyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.An option is “in-the-money” if the payoff is greater than zero.I

14、f a call option is sure to finish in-the-money, the option value would be:C0 = S0 PV(E)If the call is worth something other than this, then there is an arbitrage opportunity.A Simple ModelCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior writ

15、ten consent of McGraw-Hill Education.Stock priceAs the stock price increases, the call price increases and the put price decreases.Exercise priceAs the exercise price increases, the call price decreases and the put price increases.Time to expirationGenerally, as the time to expiration increases, bot

16、h the call and the put prices increase.Risk-free rateAs the risk-free rate increases, the call price increases and the put price decreases.What Determines Option Values?Copyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGr

17、aw-Hill Education.When an option may finish out-of-the-money (expire without being exercised), there is another factor that helps determine price.The variance in underlying asset returns is a less obvious, but important, determinant of option values.The greater the variance, the more the call and th

18、e put are worth.If an option finishes out-of-the-money, the most you can lose is your premium, no matter how far out it is.The more an option is in-the-money, the greater the gain.The owner of the option gains from volatility on the upside, but dont lose any more from volatility on the downside.What

19、 about Variance?Copyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Table 23.2Copyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent o

20、f McGraw-Hill Education.Call options that are given to employees as part of their benefits packagesOften used as a bonus or incentiveDesigned to align employee interests with stockholder interests and reduce agency problemsEmpirical evidence suggests that they dont work as well as anticipated due to

21、 the lack of diversification introduced into the employees portfolios.The stock isnt worth as much to the employee as it is to an outside investor because of the lack of diversification this suggests that options may work in limited amounts, but not as a large part of the compensation package.Employ

22、ee Stock OptionsCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Equity can be viewed as a call option on the companys assets when the firm is leveraged.The exercise price is the face value of the deb

23、t.If the assets are worth more than the debt when it comes due, the option will be exercised and the stockholders retain ownership.If the assets are worth less than the debt, the stockholders will let the option expire and the assets will belong to the bondholders.Equity as a Call OptionCopyright 20

24、19 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Almost all capital budgeting scenarios contain implicit options.A real option is an option that involves real assets as opposed to financial assets such as shares

25、of stock.Because options are valuable, they make the capital budgeting project worth more than it may appear.Failure to account for these options can cause firms to reject good projects.Capital Budgeting OptionsCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution

26、 without the prior written consent of McGraw-Hill Education.We normally assume that a project must be taken today or forgone completely.Many projects have the embedded option to wait.A good project may be worth more if we wait.A seemingly bad project may actually have a positive NPV if we wait due t

27、o changing economic conditions.We should examine the NPV of taking an investment now, or in future years, and plan to invest at the time that the project produces the highest NPV.The Investment Timing DecisionCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution w

28、ithout the prior written consent of McGraw-Hill Education.Consider a project that costs $5,000 and has an expected future cash flow of $700 per year forever. If we wait one year, the cost will increase to $5,500 and the expected future cash flow will increase to $800. If the required return is 13%,

29、should we accept the project? If so, when should we begin?NPV starting today = -5,000 + 700/.13 = 384.62NPV waiting one year = (-5,500 + 800/.13)/(1.13) = 578.62It is a good project either way, but we should wait until next year to maximize the NPV.Example: Timing OptionsCopyright 2019 McGraw-Hill E

30、ducation.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Managers often have options that can add value after a project has been implemented.It is important to do some contingency planning ahead of time to determine what will cause the

31、options to be exercised.Some examples include:The option to expand a project if it goes wellThe option to abandon a project if it goes poorlyThe option to suspend or contract operations, particularly in the manufacturing industriesStrategic options look at how taking a project might open up other op

32、portunities that would be otherwise unavailableManagerial OptionsCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.A call option issued by corporations in conjunction with other securities to reduce th

33、e yield required on the other securitiesDifferences between warrants and traditional call options:Warrants are generally very long term.They are written by the company, and warrant exercise results in additional shares outstanding.The exercise price is paid to the company, generates cash for the fir

34、m, and alters the capital structure.Warrants can normally be detached from the original securities and sold separately.Exercise of warrants reduces EPS, so warrants are included when a firm reports “diluted EPS.”WarrantsCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or dis

35、tribution without the prior written consent of McGraw-Hill Education.Convertible bonds (or convertible preferred stock) may be converted into a specified number of common shares at the option of the bondholder.The conversion price is the effective price paid for the stock.The conversion ratio is the

36、 number of shares received when the bond is converted.Convertible bonds will be worth at least the straight bond value or the conversion value, whichever is greater.ConvertiblesCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent

37、 of McGraw-Hill Education.Suppose you have a 10% bond that pays semiannual coupons and will mature in 15 years. The face value is $1,000, and the yield to maturity on similar bonds is 9%. The bond is also convertible with a conversion price of $100. The stock is currently selling for $110. What is t

38、he minimum price of the bond?Straight bond present value = $1,081.44Conversion ratio = 1,000 / 100 = 10Conversion value = 10 $110 = $1,100Minimum price = Max($1,081.44, $1,100) = $1,100Valuing ConvertiblesCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution witho

39、ut the prior written consent of McGraw-Hill Education.Call provision on a bondAllows the company to repurchase the bond prior to maturity at a specified price that is generally higher than the face valueIncreases the required yield on the bond this is effectively how the company pays for the optionP

40、ut bondAllows the bondholder to require the company to repurchase the bond prior to maturity at a fixed priceInsurance and Loan GuaranteesLoan guarantees are a form of insurance. If you lend money to someone and they default, then, with a guaranteed loan, you can collect from someone else, often the

41、 government.Other OptionsCopyright 2019 McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.What is the difference between a call option and a put option?What is the intrinsic value of call and put options, and what do the payoff diagrams look like?What are the five major determinants of option prices and their relationships to option prices?What are some of the