Sunburn Sunscreen has a zero coupon bond issue outstanding with a $12,000 face v

Question

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $12,000 face value that matures in one year. The current market value of the firm’s assets is $13,800. The standard deviation of the return on the firm’s assets is 30 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? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $12,000 face value that matures in one year. The current market value of the firm’s assets is $13,800. The standard deviation of the return on the firm’s assets is 30 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? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Face value =$12000

current value=$13800

standerd deviation =30%

Annual risk return =6%

Market value of firms equity=current value(N(d1))-Facevalue e^-rt N(d2)

By calculation of N(d1) and N(d2) from standerd normal cumalative probobilities

N(d1)= 0.7549 and N(d2) =.6255

equity value= 13800(.7459)-12000(.6255)e^(-.06)(1)

equity value =10293.42-12000*.6255*.9417

equity value=10293.42-7112.68

equity=$3180.74

2. Debit value=13800-3180.74

Debit=$10619.26

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.