A company's current value of assets is $120 millions and the volatility of the asset value is 10% per annum. The company has issued a debt whose face value is $100 millions and it needs to repay the debt in two years. The risk-free interest rate is 5% per annum. Use a two step binomial tree of the asset value in the following questions. (a) What is the current value of the debt? (b) What is the risk-neutral probability of the company's default on the debt?

A company's current value of assets is $120 millions and the volatility of the asset value is 10% per annum. The company has issued a debt whose face value is $100 millions and it needs to repay the debt in two years. The risk-free interest rate is 5% per annum. Use a two step binomial tree of the asset value in the following questions. (a) What is the current value of the debt? (b) What is the risk-neutral probability of the company's default on the debt?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 14P

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