- 3. A firm has total asset value of Vo = 100 million. The volatility...
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- 3. A firm has total asset value of Vo = 100 million. The volatility of the firm's existing asset is o 30% per annum. The firm does not pay any dividend to equity holders. The firm also has a zero-coupon debt with total face value of 150 million and maturity of T = 5 years. Suppose the firm's asset value evolves as a Geometric Brownian motion (.e., satisfies the assumptions of the Black- Scholes formula). In all of the following exercises, assume that the continuously compounded interest rate is r = 8% per annum. (a) [4 points) What is the present value of the existing debt, Bo? What is the present value of the existing equity, Eo
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