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1. Equity as an Option Sunburn Sunscreen has a zero coupon bond issue outstanding with a $20,000 face value that matures in one year. The current market value of the firm's assets is $23,200. The standard deviation of the return on the firm's assets is 27 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. Based on the Black–Scholes model, what is the market value of the firm's equity and debt?

2. Equity as an Option Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $45,000 that matures in one year. The current market value of the firm's assets is $48,600. The standard deviation of the return on the firm's assets is 35 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. Based on the Black–Scholes model, what is the market value of the firm's equity and debt? What is the firm's continuously compounded cost of debt?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91791914

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