You have the following information about Walgreen (WAG).
Beta: 1.22
Earnings Per Share: $2.91
Payout Ratio: 31.00%
Return on S&P 500: 7%
Risk-Free rate: 3%
Current share price: $35.60
D10: 1.47

WAG dividends are expected to grow at one fixed growth rate (G1) for 10 years and then at a (possibly different) constant growth rate (G2) perpetually for every year after year 10. Using only the information in the table above, find the range of values of G2 for which WAG is underpriced.


a) Absent any options, would you accept this project? Why? Why not?
b) Suppose you had the option to postpone the project for 1 year. What is the value of this option using Black-Scholes formula?
c) Suppose that you had the option to abandon this project and receive a salvage value of $65 million for the project at the end of 2 years. Using Black-Scholes formula, find the value of the option. Find the value of the project with the option.
d) Interpret your results. Which option would you take? Why?


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