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 oftheir investment. a. Using the Black-Scholes option pricing model, how much isFethe's equity worth? In your calculations round normaldistribution values to 4 decimal places. Round your answer to twodecimal places. $__________ million ? b.How much is the debt worth today? What is its yield? Roundyour answer for the debt worth to two decimal places. Round youranswer for the yield on the debt to one decimal place. Debt worth today: $ __________million Yield on the debt: _________% c. How would the equity value and the yield on the debt change if Fethe's managers could use risk management techniques to reduceits volatility to 35%?
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 oftheir investment. a. Using the Black-Scholes option pricing model, how much isFethe's equity worth? In your calculations round normaldistribution values to 4 decimal places. Round your answer to twodecimal places. $__________ million ? b.How much is the debt worth today? What is its yield? Roundyour answer for the debt worth to two decimal places. Round youranswer for the yield on the debt to one decimal place. Debt worth today: $ __________million Yield on the debt: _________% c. How would the equity value and the yield on the debt change if Fethe's managers could use risk management techniques to reduceits volatility to 35%?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter16: Capital Structure Decisions
Section: Chapter Questions
Problem 12P
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Question
Equity Viewed as an Option
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 oftheir investment.
a. Using the Black-Scholes option pricing model, how much isFethe's equity worth? In your calculations round normaldistribution values to 4 decimal places. Round your answer to twodecimal places.
$__________ million ?
b.How much is the debt worth today? What is its yield? Roundyour answer for the debt worth to two decimal places. Round youranswer for the yield on the debt to one decimal place.
Debt worth today: $ __________million
Yield on the debt: _________%
c. How would the equity value and the yield on the debt change if Fethe's managers could use risk management techniques to reduceits volatility to 35%?
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