XYZ has made the following offer to buy Little Genius. . In 6 months time if XYZs stock price is between 40 and 50 Little Genius can exchange one of its shares for 50 dollars. If the price is below 40, however, then Little Genius will receive 1.25 times the share price of XYZ in 6 months. On the other hand if the XYZ's stock price is above 50 then ABD can exchange 1 share of Little Genius for the dollar price of one share of XYZ.

(a) [3pts]Draw the payout diagram that shows what one share of Little Genius would be worth in 6 months under this proposal. Clearly indicate the axes and the values at critical points.

[8pts] Explain how you would value the deal today from the perspective of an Little Genius shareholder. Provide significant details of all the steps that you would go through to come up with an exact number. Now assume the stock price of XYZ is 45 dollars. The volatility is 28% per year. The risk free rate is 6% per year continuously compounded and the dividend yield is 2% per year continuously compounded. Value the deal.

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