Wesley Corp. stock is trading for $ 30 per share. Wesley has 24 million shares outstanding...
Wesley Corp. stock is trading for $ 30 per share. Wesley has 24 million shares outstanding and a market debt-equity ratio of 0.49. Wesley's debt is zero coupon debt with a 5-year maturity and a yield to maturity of 8 %EAR (effective annual rate).
a. Describe Wesley's equity as a call option. What is the maturity of the call option? What is the market value of the asset underlying this call option? What is the strike price of this call option? The maturity of the call option is ——years？
b. Describe Wesley's debt using a call option.
c. Describe Wesley's debt using a put option.
Homework Answers
a. maturity of the call option = 5-year maturity (zero coupon debt)
market value of the asset underlying the call option = Market value of equity + Market value of Debt
= ($30*24 million shares) + 0.49/1*($30*24 million shares)
= $720 Million + $352.8 Million
= $1072.8 Million
strike price of the call option = market value of debt
= $352.8 Million
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