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A company is looking at the following; Current value of operations, which is also its value of debt plus equity, is estimated to be $200 million. They $110 million face value, no.zero coupon debt is due in three years. Risk free rate is 5%, standard deviation deviation 60%. The owners of Company sees their view their euquity investment.

a. Using the Black-Scholes Option Pricing Model, how much is the equity worth?

Black-Scholes Option Pricing Model

Total Value of Firm

this is the current value of operations

Face Value of Debt

Risk Free rate

Maturity of debt (years)

Standard Dev.

this is sigma--also known as volatility

d1

use the formula from the text

d2

use the formula from the text

N(d1)

use the Normsdist function in the function wizard

N(d2)

Call Price = Equity Value

million

b. How much is the debt worth today? What is its yield?

Debt value = Total Value - Equity Value =

million

Debt yield =

c. How much would the equity value and the yield on the debt change if Fethe's management were able to use risk management techniques to reduce its volatility to 45 percent? Can you explain this?

Equity value at 60% volatility

million

Equity value at 45% volatility

million

Percent change

million

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