Tate & Lyle A) Tate Thesis

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Of subsidiaries

(1)

(1)

Dis. Of Subsidiaries

(4)

(4)

Dis. Of JVs

0

0

Dis. Of Businesses

57

57

Purchase of PPE

(224)

(224)

Purchase of Intangibles

(7)

(7)

Net cash Investing

(141)

(141)

Cash from Financing

Proceeds from issuance of shares

3

3

Repurchase of shares

0

0

Inflow from borrowings

1

1

Repayment of borrowings

(14)

(14)

Repayment of capital

(3)

(3)

Shareholder Dividends

(104)

(104)

Minority Interest Dividends

(1)

(1)

Net Cash Financing

(118)

(118)

Net Increase/Decrease of Cash

Balance at Beginning

Effect of changes in FX rates

40

40

Net Increase/Decrease

Balance at End

Notes: Several assumptions were made in the production of these statements. Many costs were assumed to stay the same. The company was assumed to have reduced its cost of goods sold through improvement of receivables and inventory turnover. As a result of T&L's financial strength, it was assumed that they were going to limit growth in borrowings. Their current tax liability grew in accordance with their expected tax rate for next year. Amortization and depreciation occurred with some of the company's assets, and no new investments were assumed given the uncertain revenue environment posed by the global financial crisis.

2. i) The Black-Scholes model is used to price options. The formula for Black-Scholes is:

C = SN (d1) -- X (e-rt) N (d2)

In this case, S = 432, X = 235, r = 3.7%, t = 43 days.

D1 = 2.23, so N (d1) = .9871; D2 = 1.95, so N (d2) = .974. Therefore C =

432(.

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9871) -- 235 (.99559)(.974) = 189p

ii) a) The annualized volatility of Tate & Lyle is calculated by the square root of time rule. Thus = .8177(?250) = 12.92%

The continuously generated risk free rate is the logarithm of the nominal risk free rate. In this case, the continuously generated risk free rate is R= ln (1+3.7) = 3.6332%

b) There are two main reasons for the differences between the firm's observed equity volatility and the volatility of its underlying revenue generation. One is that stock prices are forward looking, while revenue generation is backward looking. Market sentiment towards the company can be impacted by its past performance, but the correlation between the two will always be imperfect.

Another key difference is that revenue generation does not translate evenly into equity for shareholders. The firm's capital structure, its operating costs, its taxation rates and a number of other variables all impact on the degree to which revenues flow through to shareholders. The market only measures the value of the equity, not the value of the entire firm.

c) To account for the effects of the dividend, the current share price must be reduced by the amount of the expected dividend. In this case, the expected dividend is 2.268p, so the price should be set to 420.73.

Thus, we have 420.73(.584683) - 423 (177.106)

The price of a call option therefore is 68.83p.

Using put-call parity, the price of a put would be calculated as follows:

P = X (e^-rt) *.....

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