Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A. Fethe Inc. is a custom manufacturer of guitars, mandolins, and other stringed instruments and is located near Knoxville, Tennessee. Fethe's current value of operations,

A. Fethe Inc. is a custom manufacturer of guitars, mandolins, and other stringed instruments and is located near Knoxville, Tennessee. Fethe's current value of operations, which is also its value of debt plus equity, is estimated to be $6 million. Fethe has $3 million face value, zero coupon debt that is due in 2 years. The risk-free rate is 8%, and the standard deviation of returns for companies similar to Fethe is 50%. Fethe's owners view their equity investment as an option and would like to know the value of their investment.

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet

  1. Using the Black-Scholes option pricing model, how much is Fethe's equity worth? Enter your answer in millions. For example, an answer of $1.21 million should be entered as 1.21, not 1,210,000. Do not round intermediate calculations. Round your answer to two decimal places.

    $ fill in the blank 2 million

  2. How much is the debt worth today? Enter your answer in millions. For example, an answer of $1.21 million should be entered as 1.21, not 1,210,000. Do not round intermediate calculations. Round your answer to two decimal places.

    $ fill in the blank 3 million

    What is its yield? Do not round intermediate calculations. Round your answer to one decimal place.

    fill in the blank 4 %

  3. How would the equity value change if Fethe's managers could use risk management techniques to reduce its volatility to 30%? Enter your answer in millions. For example, an answer of $1.21 million should be entered as 1.21, not 1,210,000. Do not round intermediate calculations. Round your answer to two decimal places. New equity value:

    $ fill in the blank 5 million

    How would the yield on the debt change if Fethe's managers could use risk management techniques to reduce its volatility to 30%? Do not round intermediate calculations. Round your answer to one decimal place.

    New yield on the debt: fill in the blank 6 %

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Basic Finance An Introduction To Financial Institutions, Investments And Management

Authors: Herbert B Mayo

9th Edition

0324322291, 9780324322293

More Books

Students also viewed these Finance questions

Question

4 3 8 . ' '

Answered: 1 week ago