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What would B and C excel functions be?

Higgs Bassoon Corporation is a custom manufacturer ofbassoons and other wind instruments. Its current value ofoperations, which is also its value of debt plus equity, isestimated to be $200 million. Higgs has $110 million face value,zero coupon debt that is due in 3 years. The risk-free rate is 5%,and the standard deviation of returns for similar companies is 60%.The owners of Higgs Bassoon view their equity investment as anoption and would like to know the value of theirinvestment.

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

Black-Scholes Option Pricing Model

Total Value of Firm

200.00

this is the current value of operations

Face Value of Debt

110.00

Risk Free rate

5%

Maturity of debt (years)

3.00

Standard Dev.

60%

this is sigma--also known as volatility

d1

1.2392

usethe formula from the text

d2

0.2000

usethe formula from the text

N(d1)

0.8924

usethe Normsdist function in the function wizard

N(d2)

0.5793

Call Price = Equity Value

$       123.63

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 thedebt change if Fethe's management were able to use risk managementtechniques to reduce its volatility to 45 percent? Can you explainthis?

Equity value at 60% volatility

million

Equity value at 45% volatility

million

Percent change

million