A company is forecasted to pay dividends of $0.90, $1.20, and $1.45 in 3, 6, and...
A company is forecasted to pay dividends of $0.90, $1.20, and $1.45 in 3, 6, and 9 months, respectively. Given interest rates of 5.5%, how much dollar impact will dividends have on option prices? (Assume a 9-month option.)
A) $3.45
B) $3.90
C) $4.22
D) $4.50
Homework Answers
Let Dividend after month n be Dn
=> D3 = 0.90
D6 = 1.20
D9 = 1.45
Monthly Interest Rate = r = 0.055/12
Present Value of dividends = D3/(1+r)3 + D6/(1+r)6 + D9/(1+r)9
= 0.90/(1+0.055/12)3 + D6/(1+0.055/12)6 + D9/(1+0.055/12)9
= $3.45
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