Dividend Adjusted Black Scholes Merton Option Valuation with Ex-Dividend Date Calculation and Worked Pricing Solution — Suppose the stock pays ex-dividend September Rework part

Suppose the stock pays a $1.10 dividend with an ex-dividend date of September 10. Rework part a of problem 7 using an appropriate dividend-adjusted procedure. Calculate this answer by hand and then recalculate it using Black Scholes-Merton Binomial 10e.xlslm?

SOLUTION

The time to the ex-dividend date is 66 days, so t = 66/365 = 0.1808. We adjust the stock price to

165.13 – 1.10e-0.0571(0.1808) = 164.041