MBA Inc. Market Value of Assets $ 10 million Face value of pure discount bond $
ID: 2624049 • Letter: M
Question
MBA Inc.
Market Value of Assets $ 10 million
Face value of pure discount bond $ 4 million
Debt Maturity 3 years
Asset return ? 60%
Rf 5%
Compute market value of debt and equity. Use Table 17.3. DO NOT INTERPOLATE!!!
Show ALL work.
The estimated price of $5.85 is greater that the $4 price actual price, implying that the call option is underpriced. A trader believing in the Block-Scholes model would buy a call, of course, the Black-Scholes model is fallible. Perhaps the disparity between the model's estimate and the market price reflect error in the trader's estimate of variance.Explanation / Answer
market value of debt = Face value of pure discount bond/(1+rf)^3 = 4/(1+5%)^3= 3.46 million
Market value of equty = 10-3.46 = 6.54 million
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