Question
A firm is borrowing a two-year zero-coupon business loan from your bank with a repayment obligation of $7.582 million. You estimate that the market value
A firm is borrowing a two-year zero-coupon business loan from your bank with a repayment obligation of $7.582 million. You estimate that the market value of the firm’s total assets is $9.256 million. Risk-free interest rate is 3%, and the standard deviation of the rate of change in the underlying assets of the borrowing firm is 26%. Using the options framework, determine the following:
a) The current market value of the loan.
b) The interest rate to be charged on the loan.
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Fundamentals of Corporate Finance
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates
3rd edition
1118845897, 978-1118845899
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