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Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 23, Problem 14PS
Default option Digital Organics has 10 million outstanding shares trading at $25 per share. It also has a large amount of debt outstanding, all coming due in one year. The debt pays interest at 8%. It has a face value of $350 million but is trading at a market value of only $280 million. The one-year risk-free interest rate is 6%.
- a. Write out the put–call parity formula for Digital Organics’s stock, debt, and assets.
- b. What is the value of the company’s option to default on its debt?
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What return should investors expect to earn on these bonds?
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because the YTC is greater than the YTM. III. Investors would not expect the bonds to be called and to earn the YTM
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J-Rata Corp shares are currently trading at $30 each. It is expected to increase by 10% or decrease by 6% during the next two-three months. If its strike price at maturity in six months is set as $32 and the risk free rate is 8% per annum for all maturities:
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(b)Test and prove that the put-call parity is holding based on your option pricing.
Chapter 23 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
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