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( 1 4 % ; 2 % for each subquestion ) A firm has non - dividend - paying equity ( Et: equity value at
; for each subquestion A firm has nondividendpaying equity Et: equity value at time and
zerocoupon debt Bt: debt value at time ; promised payment at time is is the asset value of the
firm at time continuous time asset volatility years.
a What is the current market value of equity?
b What is the current market value of risky debt?
c Calculate the quasi debttoasset ratio
d Calculate credit spread
e If the promised payment at time changes from to calculate the percent change of the
quasi debttoasset ratio
f If the promised payment at time changes from to calculate the new credit spread and
the percent change of the credit spread.
g If the promised payment at time changes from to calculate the new equity value and the
percent change of the equity value.
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