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Problem 2

You are a member of the investment committee for a large manufacturing company that two years
ago licensed a new technology from a small start-up firm. Based largely on that technology,
engineers in one of your companys divisions developed a new product that is now ready for launch.
The division president recommends proceeding with the project and has requested authorization and
funding to begin the launch. Your committee has to decide whether to endorse the recommendation
and authorize the necessary funding. If your company does not proceed with the launch within the
________________________________________________________________________________________________________________
year, the licensor has the right to suspend your license and attempt to market the technology to
another manufacturer.

The product launch will require a significant investment: $145 million during the first year for
manufacturing capacity, working capital, and marketing and distribution. Net after-tax cash flows
are expected to be $10, $12, and $15 million in the following three years of operation, at which point
the capacity will be fully utilized. The manufacturing assets are expected to have a very long useful
life and necessary maintenance expenditures are included in the after-tax cash flow projections. Your
company uses a hurdle rate of 10% for investments in its core business. However, the investment
committee considers this product launch to be riskier than the core business and has stipulated that a
15% hurdle rate will apply. The risk-free rate is currently 5%.

The headquarters analyst assigned to examine the project prepared a report showing that, at 15%,
the NPV of the proposed investment is negative. When the division president was shown a
preliminary copy of the report, she took strong exception to the analysis. In a memo to the CFO, who
also chairs the investment committee, she outlined her objections.

First, she argued, the discount rate is inappropriate. The committees insistence on 15% is myopic
and penalizes the project unjustifiably. In her view the project should be treated the same, at least, as
other projects, which suggests a hurdle rate of 10%. In fact, given the new products strategic
importance to the division and to the corporation as a whole, an even lower discount rate she
suggested 8% would be justified.

Second, she argued, the analysts cash flows are wrong. The new product targets a very large
market and is a key part of the divisions growth plans. After three years, once the original capacity
is fully utilized, she can add twice again as much capacity for less than twice the additional
expenditure. Specifically, an incremental investment of $250 million will generate additional cash
flows of $20, $24, and $30 million in the subsequent three years, and this capacity, too, would have a
very long life. Three years after this second investment, the division can invest another $450 million
and receive incremental net cash flows of $40, $48, and $60 million in the subsequent three years.
Thus, the memo noted, the new products annual net cash flow is expected to grow from $0 to $100+
million within ten years, implying a compound annual growth rate of more than 30%. By
comparison, the analyst used a growing perpetuity to estimate the terminal value of the project in
year 3, and applied a growth rate of only 3%. Accordingly, the analyst is either wrong to adopt the
three-year horizon, and/or wrong to apply such a low growth rate.

The division presidents memo concluded by observing that although all the analytical errors
should be corrected for the record, even if only one was fixed, the projects NPV would be positive.
Not only is it a good investment, it is actually a very good investment.

In a follow-up memo the analyst defended his original figures. It was perfectly legitimate, he
argued, to separate the sequence of investments because each could be analyzed on its own merits at
the appropriate time. In fact, only the initial investment of $145 million was now before the
committee. Nevertheless, he claimed to be indifferent about whether he evaluated them separately
(see Table A) or added them all together (Table B). Discounting at 15%, none of the three
investments had a positive NPV and so neither did the whole program. At 10% the project currently
being reviewed looked better, naturally, and the committee was free to accord it the special treatment
requested. But the analyst respectfully observed that a new product launch was almost certainly
riskier than the established core business. Even if 15% was too high (which he doubted) surely 10%
was too low. At any hurdle rate which reflected the higher risk of a product introduction, the project
was unimpressive.

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Table A
Round 1
Year 0 1 2 3 4 5 6 7 8 9
After-tax cash flow 10.0 12.0 15.0 15.5 15.9 16.4 16.9 17.4 17.9
Investment -145.0
Net cash flow -145.0 10.0 12.0 15.0 15.5 15.9 16.4 16.9 17.4 17.9

Round 2
Year 0 1 2 3 4 5 6 7 8 9
After-tax cash flow 20.0 24.0 30.0 30.9 31.8 32.8
Investment -250.0
Net cash flow 0 0 0 -250.0 20.0 24.0 30.0 30.9 31.8 32.8

Round 3
Year 0 1 2 3 4 5 6 7 8 9
After-tax cash flow 40.0 48.0 60.0
Investment -450.0
Net cash flow 0 0 0 0 0 0 -450.0 40.0 48.0 60.0

Table B
Rounds 1-3
Year 0 1 2 3 4 5 6 7 8 9
After-tax cash flow 0.0 10.0 12.0 15.0 35.5 39.9 46.4 87.8 97.2 110.7
Investment -145.0 -250.0 -450.0
Net cash flow -145.0 10.0 12.0 -235.0 35.5 39.9 -403.6 87.8 97.2 110.7

a. Evaluate the proposed launch using a standard discounted cash flow approach. How should
the committee address the issue of which discount rate to use? Which phases should be
included? What growth rate should be used?

b. Evaluate the program as a portfolio of options (you should begin by ignoring, at first, the
opportunity to invest $450 in year 6 and focus only on the first two rounds of investment).
You may use the Black-Scholes-Merton model and a calculator or the pricing table in the
Appendix. Assume that, though you are unsure of the standard deviation of returns on the
assets under consideration, you are confident that s is at least 40% per year and no more than
60%. Based on this approach, what course of action do you recommend to the committee?

c. How should the year 6 opportunity be incorporated into an options-based analysis of the
whole program?

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Problem 3

A product based on a new technology has two major potential markets. The dominant uncertainty
associated with it has to do with the technology rather than the markets. Accordingly, the product
will succeed in both or fail in both, with equal probability. The markets are otherwise independent
and may be entered sequentially or simultaneously either now, one year from now, or two years from
now. Market A requires an initial investment of $100 regardless of when it is entered. If the product
is successful, market A will have a present value of $160 one year after entry. If the product fails,
market A will be worth $80 one year after entry. Market B requires an initial investment of $55
regardless of when it is entered. One year after entry, B will have a present value of $140 or $25 for
success and failure, respectively. For simplicity, perform all discounting in this problem at 5%.

a. What is the NPV for each market, assuming each is entered immediately?

b. Examine the possible combinations of time and place for introducing the new product. Can
any possibilities be eliminated as suboptimal without further calculations? Why or why not?
Which entry strategy is optimal?

c. State a general capital budgeting rule for selecting the optimal strategy in this and similar
problems.

d. Suppose there are three potential markets, A, B, and C, where A and B are as above and C
requires an investment of $40 regardless of when entered and will be worth either $55 or $40
one year later. Test the decision rule you formulated in part (c.) above to check that it
produces the optimal decision for this revised problem.

4
Appendix
Black-Scholes-Merton Value of a European Call Option, Expressed as a Percentage of Underlying Asset Value
NPVq = (Underlying asset value) / PV(Exercise price)

0.30 0.35 0.40 0.45 0.50 0.55 0.60 0.65 0.70 0.75 0.80 0.82 0.84 0.86 0.88 0.90 0.92 0.94 0.96 0.98 1.00 1.02 1.04 1.06 1.08 1.10 1.12 1.14 1.16 1.18 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.75 2.00 2.50
0.05 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.3 0.6 1.2 2.0 3.1 4.5 6.0 7.5 9.1 10.7 12.3 13.8 15.3 16.7 20.0 23.1 25.9 28.6 31.0 33.3 42.9 50.0 60.0 0.05
0.10 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.3 0.5 0.8 1.2 1.7 2.3 3.1 4.0 5.0 6.1 7.3 8.6 10.0 11.3 12.7 14.1 15.4 16.8 20.0 23.1 25.9 28.6 31.0 33.3 42.9 50.0 60.0 0.10
0.15 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.5 0.7 1.0 1.3 1.7 2.2 2.8 3.5 4.2 5.1 6.0 7.0 8.0 9.1 10.2 11.4 12.6 13.8 15.0 16.2 17.4 20.4 23.3 26.0 28.6 31.1 33.3 42.9 50.0 60.0 0.15
0.20 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.4 0.8 1.5 1.9 2.3 2.8 3.4 4.0 4.7 5.4 6.2 7.1 8.0 8.9 9.9 10.9 11.9 13.0 14.1 15.2 16.3 17.4 18.5 21.2 23.9 26.4 28.9 31.2 33.5 42.9 50.0 60.0 0.20
0.25 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.5 1.0 1.8 2.8 3.3 3.9 4.5 5.2 5.9 6.6 7.4 8.2 9.1 9.9 10.9 11.8 12.8 13.7 14.7 15.7 16.7 17.7 18.7 19.8 22.3 24.7 27.1 29.4 31.7 33.8 42.9 50.0 60.0 0.25
0.30 0.0 0.0 0.0 0.1 0.1 0.3 0.7 1.2 2.0 3.1 4.4 5.0 5.7 6.3 7.0 7.8 8.6 9.4 10.2 11.1 11.9 12.8 13.7 14.6 15.6 16.5 17.4 18.4 19.3 20.3 21.2 23.5 25.8 28.1 30.2 32.3 34.3 43.1 50.1 60.0 0.30
0.35 0.0 0.0 0.1 0.2 0.4 0.8 1.4 2.3 3.3 4.6 6.2 6.8 7.5 8.2 9.0 9.8 10.6 11.4 12.2 13.0 13.9 14.8 15.6 16.5 17.4 18.3 19.2 20.1 21.0 21.9 22.7 24.9 27.1 29.2 31.2 33.2 35.1 43.5 50.2 60.0 0.35
0.40 0.0 0.1 0.2 0.5 0.9 1.6 2.4 3.5 4.8 6.3 8.0 8.7 9.4 10.2 11.0 11.7 12.5 13.4 14.2 15.0 15.9 16.7 17.5 18.4 19.2 20.1 20.9 21.8 22.6 23.5 24.3 26.4 28.4 30.4 32.3 34.2 36.0 44.0 50.5 60.1 0.40
0.45 0.1 0.2 0.5 1.0 1.7 2.6 3.7 5.0 6.5 8.1 9.9 10.6 11.4 12.2 12.9 13.7 14.5 15.3 16.2 17.0 17.8 18.6 19.4 20.3 21.1 21.9 22.7 23.5 24.3 25.1 25.9 27.9 29.8 31.7 33.5 35.3 37.0 44.6 50.8 60.2 0.45
0.50 0.2 0.5 1.0 1.7 2.6 3.7 5.1 6.6 8.2 10.0 11.8 12.6 13.4 14.2 14.9 15.7 16.5 17.3 18.1 18.9 19.7 20.5 21.3 22.1 22.9 23.7 24.5 25.3 26.1 26.8 27.6 29.5 31.3 33.1 34.8 36.4 38.1 45.3 51.3 60.4 0.50
0.55 0.5 1.0 1.7 2.6 3.8 5.1 6.6 8.3 10.0 11.9 13.8 14.6 15.4 16.1 16.9 17.7 18.5 19.3 20.1 20.9 21.7 22.4 23.2 24.0 24.8 25.5 26.3 27.0 27.8 28.5 29.2 31.0 32.8 34.5 36.1 37.7 39.2 46.1 51.9 60.7 0.55
0.60 0.9 1.6 2.5 3.7 5.1 6.6 8.3 10.1 11.9 13.8 15.8 16.6 17.4 18.1 18.9 19.7 20.5 21.3 22.0 22.8 23.6 24.3 25.1 25.8 26.6 27.3 28.1 28.8 29.5 30.2 30.9 32.6 34.3 35.9 37.5 39.0 40.4 47.0 52.5 61.0 0.60
0.65 1.4 2.4 3.6 4.9 6.5 8.2 10.0 11.9 13.8 15.8 17.8 18.6 19.3 20.1 20.9 21.7 22.5 23.2 24.0 24.7 25.5 26.2 27.0 27.7 28.4 29.1 29.8 30.5 31.2 31.9 32.6 34.2 35.8 37.4 38.9 40.3 41.7 48.0 53.3 61.4 0.65
0.70 2.1 3.3 4.7 6.3 8.1 9.9 11.9 13.8 15.8 17.8 19.8 20.6 21.3 22.1 22.9 23.6 24.4 25.2 25.9 26.6 27.4 28.1 28.8 29.5 30.2 30.9 31.6 32.3 32.9 33.6 34.2 35.8 37.3 38.8 40.3 41.6 43.0 49.0 54.0 61.9 0.70
0.75 3.0 4.4 6.1 7.9 9.8 11.7 13.7 15.8 17.8 19.8 21.8 22.5 23.3 24.1 24.8 25.6 26.3 27.1 27.8 28.5 29.2 29.9 30.6 31.3 32.0 32.7 33.3 34.0 34.6 35.3 35.9 37.4 38.9 40.3 41.7 43.0 44.3 50.0 54.9 62.4 0.75
0.80 4.0 5.7 7.5 9.5 11.5 13.6 15.7 17.7 19.8 21.8 23.7 24.5 25.3 26.0 26.8 27.5 28.3 29.0 29.7 30.4 31.1 31.8 32.4 33.1 33.8 34.4 35.1 35.7 36.3 36.9 37.5 39.0 40.4 41.8 43.1 44.4 45.6 51.1 55.8 63.0 0.80
0.85 5.1 7.1 9.1 11.2 13.3 15.5 17.6 19.7 21.8 23.8 25.7 26.5 27.2 28.0 28.7 29.4 30.2 30.9 31.6 32.2 32.9 33.6 34.2 34.9 35.5 36.2 36.8 37.4 38.0 38.6 39.2 40.6 41.9 43.3 44.5 45.8 46.9 52.2 56.7 63.6 0.85
0.90 6.4 8.5 10.7 13.0 15.2 17.4 19.6 21.7 23.8 25.8 27.7 28.4 29.2 29.9 30.6 31.3 32.0 32.7 33.4 34.1 34.7 35.4 36.0 36.6 37.3 37.9 38.5 39.1 39.6 40.2 40.8 42.1 43.5 44.7 46.0 47.1 48.3 53.3 57.6 64.3 0.90
0.95 7.8 10.1 12.5 14.8 17.1 19.4 21.6 23.7 25.7 27.7 29.6 30.4 31.1 31.8 32.5 33.2 33.9 34.6 35.2 35.9 36.5 37.2 37.8 38.4 39.0 39.6 40.1 40.7 41.3 41.8 42.4 43.7 45.0 46.2 47.4 48.5 49.6 54.5 58.6 65.0 0.95
1.00 9.3 11.8 14.3 16.7 19.1 21.4 23.6 25.7 27.7 29.7 31.6 32.3 33.0 33.7 34.4 35.1 35.7 36.4 37.0 37.7 38.3 38.9 39.5 40.1 40.7 41.2 41.8 42.4 42.9 43.4 44.0 45.2 46.5 47.6 48.8 49.9 50.9 55.6 59.5 65.7 1.00
1.05 10.9 13.6 16.1 18.6 21.0 23.3 25.6 27.7 29.7 31.6 33.5 34.2 34.9 35.6 36.2 36.9 37.6 38.2 38.8 39.4 40.0 40.6 41.2 41.8 42.4 42.9 43.5 44.0 44.5 45.0 45.5 46.8 48.0 49.1 50.2 51.2 52.2 56.7 60.5 66.5 1.05
1.10 12.6 15.4 18.0 20.6 23.0 25.3 27.5 29.6 31.6 33.5 35.4 36.1 36.7 37.4 38.1 38.7 39.3 40.0 40.6 41.2 41.8 42.3 42.9 43.5 44.0 44.5 45.1 45.6 46.1 46.6 47.1 48.3 49.4 50.5 51.6 52.6 53.5 57.9 61.5 67.2 1.10
1.15 14.4 17.2 20.0 22.5 25.0 27.3 29.5 31.6 33.6 35.4 37.2 37.9 38.6 39.2 39.9 40.5 41.1 41.7 42.3 42.9 43.5 44.0 44.6 45.1 45.6 46.2 46.7 47.2 47.7 48.2 48.6 49.8 50.9 51.9 52.9 53.9 54.9 59.0 62.5 68.0 1.15
1.20 16.2 19.1 21.9 24.5 27.0 29.3 31.5 33.6 35.5 37.3 39.1 39.7 40.4 41.0 41.7 42.3 42.9 43.5 44.0 44.6 45.1 45.7 46.2 46.7 47.3 47.8 48.3 48.7 49.2 49.7 50.1 51.3 52.3 53.3 54.3 55.2 56.1 60.2 63.5 68.8 1.20
1.25 18.1 21.1 23.9 26.5 29.0 31.3 33.5 35.5 37.4 39.2 40.9 41.5 42.2 42.8 43.4 44.0 44.6 45.2 45.7 46.3 46.8 47.3 47.8 48.4 48.8 49.3 49.8 50.3 50.7 51.2 51.6 52.7 53.7 54.7 55.7 56.6 57.4 61.3 64.5 69.6 1.25
1.30 20.0 23.0 25.9 28.5 31.0 33.3 35.4 37.4 39.3 41.0 42.7 43.3 43.9 44.5 45.1 45.7 46.3 46.8 47.4 47.9 48.4 48.9 49.4 49.9 50.4 50.9 51.3 51.8 52.2 52.7 53.1 54.1 55.1 56.1 57.0 57.9 58.7 62.4 65.5 70.4 1.30

Cumulative Volatility t
1.35 21.9 25.0 27.9 30.5 33.0 35.2 37.3 39.3 41.1 42.8 44.4 45.1 45.7 46.3 46.8 47.4 47.9 48.5 49.0 49.5 50.0 50.5 51.0 51.5 52.0 52.4 52.9 53.3 53.7 54.1 54.6 55.6 56.5 57.4 58.3 59.1 59.9 63.5 66.5 71.1 1.35
1.40 23.9 27.0 29.9 32.5 34.9 37.1 39.2 41.1 42.9 44.6 46.2 46.8 47.4 47.9 48.5 49.0 49.6 50.1 50.6 51.1 51.6 52.1 52.6 53.0 53.5 53.9 54.3 54.8 55.2 55.6 56.0 56.9 57.9 58.7 59.6 60.4 61.2 64.6 67.5 71.9 1.40
1.45 25.8 29.0 31.9 34.5 36.9 39.1 41.1 43.0 44.7 46.4 47.9 48.5 49.0 49.6 50.1 50.7 51.2 51.7 52.2 52.7 53.2 53.6 54.1 54.5 55.0 55.4 55.8 56.2 56.6 57.0 57.4 58.3 59.2 60.0 60.9 61.6 62.4 65.7 68.4 72.7 1.45
1.50 27.8 31.0 33.8 36.4 38.8 40.9 42.9 44.8 46.5 48.1 49.6 50.1 50.7 51.2 51.8 52.3 52.8 53.3 53.7 54.2 54.7 55.1 55.6 56.0 56.4 56.8 57.2 57.6 58.0 58.4 58.8 59.7 60.5 61.3 62.1 62.9 63.6 66.8 69.4 73.5 1.50
1.55 29.8 33.0 35.8 38.4 40.7 42.8 44.8 46.6 48.2 49.8 51.2 51.8 52.3 52.8 53.3 53.8 54.3 54.8 55.3 55.7 56.2 56.6 57.0 57.4 57.8 58.2 58.6 59.0 59.4 59.7 60.1 61.0 61.8 62.6 63.3 64.1 64.7 67.8 70.3 74.3 1.55
1.60 31.8 35.0 37.8 40.3 42.6 44.6 46.5 48.3 49.9 51.4 52.8 53.4 53.9 54.4 54.9 55.4 55.9 56.3 56.8 57.2 57.6 58.0 58.5 58.9 59.2 59.6 60.0 60.4 60.7 61.1 61.4 62.3 63.1 63.8 64.5 65.2 65.9 68.8 71.3 75.1 1.60
1.65 33.8 36.9 39.7 42.2 44.4 46.4 48.3 50.0 51.6 53.1 54.4 54.9 55.4 55.9 56.4 56.9 57.3 57.8 58.2 58.6 59.1 59.5 59.9 60.2 60.6 61.0 61.4 61.7 62.1 62.4 62.7 63.5 64.3 65.0 65.7 66.4 67.0 69.9 72.2 75.9 1.65
1.70 35.8 38.9 41.6 44.0 46.2 48.2 50.0 51.7 53.2 54.7 56.0 56.5 57.0 57.5 57.9 58.4 58.8 59.2 59.7 60.1 60.5 60.9 61.2 61.6 62.0 62.3 62.7 63.0 63.4 63.7 64.0 64.8 65.5 66.2 66.9 67.5 68.2 70.9 73.1 76.6 1.70
1.75 37.7 40.8 43.5 45.9 48.0 50.0 51.7 53.4 54.8 56.2 57.5 58.0 58.5 58.9 59.4 59.8 60.2 60.7 61.1 61.5 61.8 62.2 62.6 62.9 63.3 63.6 64.0 64.3 64.6 64.9 65.3 66.0 66.7 67.4 68.0 68.7 69.2 71.9 74.0 77.4 1.75
2.00 47.3 50.1 52.5 54.6 56.5 58.2 59.7 61.1 62.4 63.6 64.6 65.0 65.4 65.8 66.2 66.6 66.9 67.3 67.6 67.9 68.3 68.6 68.9 69.2 69.5 69.8 70.0 70.3 70.6 70.8 71.1 71.7 72.3 72.9 73.4 73.9 74.4 76.5 78.3 81.0 2.00
2.25 56.1 58.6 60.7 62.5 64.1 65.6 66.8 68.0 69.1 70.0 70.9 71.3 71.6 71.9 72.2 72.5 72.8 73.1 73.4 73.7 73.9 74.2 74.4 74.7 74.9 75.2 75.4 75.6 75.8 76.0 76.3 76.8 77.2 77.7 78.1 78.5 78.9 80.6 82.1 84.3 2.25
2.50 64.0 66.1 67.9 69.4 70.8 72.0 73.1 74.0 74.9 75.7 76.4 76.7 77.0 77.2 77.5 77.7 78.0 78.2 78.4 78.7 78.9 79.1 79.3 79.5 79.7 79.9 80.0 80.2 80.4 80.6 80.7 81.1 81.5 81.9 82.2 82.6 82.9 84.3 85.4 87.2 2.50
2.75 70.9 72.7 74.2 75.4 76.6 77.5 78.4 79.2 79.9 80.5 81.1 81.4 81.6 81.8 82.0 82.2 82.4 82.6 82.7 82.9 83.1 83.3 83.4 83.6 83.7 83.9 84.0 84.2 84.3 84.4 84.6 84.9 85.2 85.5 85.8 86.0 86.3 87.4 88.3 89.7 2.75
3.00 76.9 78.3 79.5 80.5 81.4 82.2 82.9 83.5 84.1 84.6 85.1 85.3 85.4 85.6 85.8 85.9 86.1 86.2 86.4 86.5 86.6 86.8 86.9 87.0 87.1 87.3 87.4 87.5 87.6 87.7 87.8 88.1 88.3 88.5 88.8 89.0 89.2 90.0 90.7 91.8 3.00
3.50 86.0 86.9 87.6 88.3 88.8 89.3 89.7 90.1 90.5 90.8 91.1 91.2 91.3 91.4 91.5 91.6 91.6 91.7 91.8 91.9 92.0 92.1 92.1 92.2 92.3 92.4 92.4 92.5 92.6 92.6 92.7 92.8 93.0 93.1 93.3 93.4 93.5 94.0 94.4 95.1 3.50
4.00 92.0 92.5 92.9 93.3 93.6 93.9 94.2 94.4 94.6 94.8 94.9 95.0 95.0 95.1 95.2 95.2 95.3 95.3 95.4 95.4 95.4 95.5 95.5 95.6 95.6 95.7 95.7 95.7 95.8 95.8 95.8 95.9 96.0 96.1 96.2 96.2 96.3 96.6 96.8 97.2 4.00
4.50 95.7 96.0 96.2 96.4 96.6 96.7 96.9 97.0 97.1 97.2 97.3 97.3 97.3 97.4 97.4 97.4 97.5 97.5 97.5 97.5 97.6 97.6 97.6 97.6 97.6 97.7 97.7 97.7 97.7 97.8 97.8 97.8 97.9 97.9 97.9 98.0 98.0 98.2 98.3 98.5 4.50
5.00 97.8 97.9 98.1 98.2 98.3 98.3 98.4 98.5 98.5 98.6 98.6 98.6 98.6 98.7 98.7 98.7 98.7 98.7 98.7 98.7 98.8 98.8 98.8 98.8 98.8 98.8 98.8 98.8 98.8 98.9 98.9 98.9 98.9 98.9 99.0 99.0 99.0 99.1 99.1 99.2 5.00
6.00 99.5 99.5 99.6 99.6 99.6 99.6 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.7 99.8 99.8 99.8 99.8 99.8 99.8 99.8 99.8 99.8 99.8 99.8 6.00

Note: Values in the table represent percentages of underlying asset values: e.g., 39.3 denotes a call option worth 39.3% of the underlying asset value.
Values in the table were computed from the Black-Scholes option pricing model.
The format of the table was adapted from Brealey and Myers, Principles of Corporate Finance, 4th edition, McGraw-Hill, Inc., New York, 1991, Appendix Table 6, pp. AP12-13.