A. Fethe Inc. is a custom manufacturer of guitars, mandolins, and other stringed instruments and is located near Knoxville, Tennessee. Fethe's current value of operations, which is also its value of debt plus equity, is estimated to be $5 million. Fethe has $2 million face value, zero coupon debt that is due in 2 years. The risk-free rate is 6%, and the standard deviation of returns for companies similar to Fethe is 50%. Fethe's owners view their equity investment as an option and they would like to know the value of their investment. a. Using the Black-Scholes option pricing model, how much is Fethe's equity worth? b. How much is the debt worth today? What is its yield? c. How would the equity value and the yield on the debt change if Fethe's managers could use risk management techniques to reduce its volatility to 30%? Can explain this? you

A. Fethe Inc. is a custom manufacturer of guitars, mandolins, and other stringed instruments and is located near Knoxville, Tennessee. Fethe's current value of operations, which is also its value of debt plus equity, is estimated to be $5 million. Fethe has $2 million face value, zero coupon debt that is due in 2 years. The risk-free rate is 6%, and the standard deviation of returns for companies similar to Fethe is 50%. Fethe's owners view their equity investment as an option and they would like to know the value of their investment. a. Using the Black-Scholes option pricing model, how much is Fethe's equity worth? b. How much is the debt worth today? What is its yield? c. How would the equity value and the yield on the debt change if Fethe's managers could use risk management techniques to reduce its volatility to 30%? Can explain this? you

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter8: Basic Stock Valuation

Section: Chapter Questions

Problem 18P: Free Cash Flow Valuation Dozier Corporation is a fast-growing supplier of office products. Analysts...

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Baumol Model and Miller-Orr Model 3. Buccaneer, Inc., has determined that it needs $10 million in cash per week. If Buccaneer needs additional cash, it can sell marketable securities, incurring a fee of $100 for each transaction. If Buccaneer leaves funds in its marketable securities, it expects to earn approximately 0.2% per week on their investment.
PROBLEM The Seminole Company wishes to apply the Miller-Orr model to manage its cash investment. Seminole’s management has determined that the cost of either investing in or selling marketable securities is $200. By looking at Seminole Company’s past cash needs, they have determined that the variance of daily cash flows is $10,000. Seminole Company’s opportunity cost of cash, per day, is estimated to be 0.05%. Seminole management has figured, based on their experience dealing with the cash flows of the company, that there should be a cushion— a safety stock—of cash of $20,000. 4. How much is the lower limit based on the Miller-Orr model of cash management?(Use a number, no decimal value, no commas, no currency, no space) * 5. How much is the upper limit based on the Miller-Orr model of cash management? (Use a number, no decimal value, no commas, no currency, no space) * 6.How much is the return point based on the Miller-Orr model of cash management? (Use a number, no decimal value, no…
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