Homework Answers
| Requirement a | ||
| Using the Black Scholes Option Pricing Model, how much is the equity worth? | ||
| Black Scholes Option Pricing Model | ||
| Total Value of Firm | 200 million | this is the current value of operations |
| Face Value of Debt | 100 million | |
| Risk Free Rate | 5% | |
| Maturity of Debt (years) | 3 years | |
| Standard Deviation | 0.45 | this is sigma also known as volatility |
| d1 | 1.4750 | use the formula from the text |
| d2 | 0.6920 | use the formula from the text |
| N(d1) | 0.9294 | use the Normsdist function in the function wizrd |
| N(d2) | 0.7555 | |
| Call Price = Equity Value | $120.85 | million |
| Requirement b | ||
| How much is the debt worth today? What is its yield? | ||
| Debt Value = Total Value - Equity Value = | $79.15 | million |
| Debt Yield = | 8.107% | |
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