Digital Organics has 10 million outstanding shares trading at $25 per share. It also has a large amount of debt outstanding, all coming due in one year. The debt pays interest at 8%. It has a par (face) value of $350 million, but is trading at a market value of only $280 million. The one-year risk-free interest rate is 6%.

a. Write out the put–call parity formula for Digital Organics’ stock, debt, and assets.

b. What is the value of the company’s option to default on its debt?

AppendixLO1