3. Consider company B which issued equity and zero-coupon bonds with a maturity of 1 year.

Assume that the value of the firm is $100 and the value of the equity is $50 million. The risk-free rate is 2%. The equity volatility is 30%.

a. What is the market value of debt and the implied credit spread?

b. Assume that the company has 1 million shares outstanding. Plot the credit spread against the share price for a range of different share price values.

c. Plot the hedge ratios for different values of the share price.