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montecristo
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Joined: February 25th, 2008, 8:24 pm

Million dollars contract

May 7th, 2009, 8:34 am

One of your friends is the owner of a newly Wall Street coted Start Up (worth 10$ today). You think that his start up will be a very good investment. So he proposes to you the following contract: You give him today 200$, and if in the futur the stock reachs 500$, he will give you one million dollars immediatly. He also tells you that the firm has the following "dilution" rule: if the stock reachs 100$, it will be devided by 5 and every holder will have (naturally) 5 shares (each share is worth 20), and then starting from 20$, if it reachs 200$ it will be devided by 5, and so on...Would you by this contract?
 
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cm27874
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Joined: July 2nd, 2007, 12:10 pm

Million dollars contract

May 7th, 2009, 10:13 am

If I am understanding it right, one share will have been split into 625 shares when the stock reaches 500$ for the first time. Is 10$ meant to be the current share price? In this case, buy shares 200$ worth. When the price is at 500$ for the first time, your shares will be worth 625 * 200 * 50 = 6250000$ > 1000000$.
 
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montecristo
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Joined: February 25th, 2008, 8:24 pm

Million dollars contract

May 7th, 2009, 2:01 pm

To be more precise: The stock is 10$ today. when the stock reachs 100$ it will be splited in 5. Strating from 20, when it reachs 200 it will be splitted in 5. Starting from 40, when it reachs 400 it will also be splitted in 5,...........cm27874, you have a little mistake in your proofHow much would you pay this contract?PS: The stock gives no dividends
 
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FalsePositive
Posts: 4
Joined: March 10th, 2009, 1:12 am

Million dollars contract

May 7th, 2009, 2:53 pm

QuoteOriginally posted by: montecristoOne of your friends is the owner of a newly Wall Street coted Start Up (worth 10$ today). You think that his start up will be a very good investment. So he proposes to you the following contract: You give him today 200$, and if in the futur the stock reachs 500$, he will give you one million dollars immediatly. He also tells you that the firm has the following "dilution" rule: if the stock reachs 100$, it will be devided by 5 and every holder will have (naturally) 5 shares (each share is worth 20), and then starting from 20$, if it reachs 200$ it will be devided by 5, and so on...Would you by this contract? 20 * (10$ --> 100$ --> 5*20$) 5 * 20 * (20$ --> 200$ --> 5*40$) 5 * 5 * 20 * (40$ --> 400$ --> 5*80$) 5 * 5 * 5 * 20 * (80$ --> 500$)So when the stock price reaches 500$ I will have 20*(5^3) shares with the total value 20 * (5^3) * 500$ = 1250000$ which results in a better profit than the contract offers.
 
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cm27874
Posts: 2
Joined: July 2nd, 2007, 12:10 pm

Million dollars contract

May 8th, 2009, 4:31 am

QuoteOriginally posted by: montecristoTo be more precise: The stock is 10$ today. when the stock reachs 100$ it will be splited in 5. Strating from 20, when it reachs 200 it will be splitted in 5. Starting from 40, when it reachs 400 it will also be splitted in 5,...........cm27874, you have a little mistake in your proofHow much would you pay this contract?PS: The stock gives no dividendsFrom your original posting it was not clear that there is no dilution when the stock reaches 300$ for the first time. That gives the difference between 1250000 and 6250000.