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( 1 4 % ; 2 % for each subquestion ) A firm has non - dividend - paying equity ( Et: equity value at

(14%;2% for each subquestion) A firm has non-dividend-paying equity (Et: equity value at time t) and
zero-coupon debt (Bt: debt value at time t; promised payment at time T is 250).At is the asset value of the
firm at time t.A0=280,rc=2%(continuous time), asset volatility =20%,T=5 years.
(a) What is the current market value of equity?
(b) What is the current market value of risky debt?
(c) Calculate the quasi debt-to-asset ratio d=(Be-TTA0).
(d) Calculate credit spread (Y-r)=(-1T)**ln[N(d2)+(1d)**(N)(-d1)].
(e) If the promised payment at time T changes from 250 to 300, calculate the percent change (%) of the
quasi debt-to-asset ratio d.
(f) If the promised payment at time T changes from 250 to 300, calculate the new credit spread (%) and
the percent change (%) of the credit spread.
(g) If the promised payment at time T changes from 250 to 300, calculate the new equity value and the
percent change (%) of the equity value.
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