The owner of a pro-football team expects the team to be worth either $270 million next year or $120 million, depending on whether or not she gets the city to build a new stadium. There is a 60 percent chance she will get a new stadium. There is a buyer willing to pay $180 million for the team right now. However, the buyer will keep his offer open-until the stadium issue is resolved-if offered some form of compensation. If the interest rate is 6 percent, how much should she be willing to pay the potential buyer for a one-year option to sell the team (round to the nearest $1 million)?
A)0
B)$40 million
C)$42 million
D)$21 million

Question

Quizplus · Accepted Answer

The value of the option is the difference between the expected value of the team with the option and the expected value of the team without the option. The expected value of the team with the option is:(0.6 * $270 million) + (0.4 * $120 million) = $180 millionThe expected value of the team without the option is $180 million. Therefore, the value of the option is $0.

The Owner of a Pro-Football Team Expects the Team to Be