What is the difference in the expected returns on equity when using a Black-Scholes formula versus a traditional weighted average formula? Assume r_A= 0.12, r_f= 0.06, asset value = $170, equity value = $45, debt to value ratio = 0.55, and delta = 0.6500. A) 1.00% B) 1.20% C) 1.40% D) 1.60%

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The expected return on equity using the Black-Scholes formula considers the delta, which adjusts the risk exposure. The traditional weighted average formula does not account for this, leading to a difference of 1.40% in expected returns.

What Is the Difference in the Expected Returns on Equity