(a)Assume that as of 15 Jan 2020, Hi-Tech had no debt or cash. The firm's managers consider recapitalising the firm by issuing zero-coupon debt with a face value of $30 billion due in Jul of 2022, and using the proceeds to repurchase shares. Assume that before issuing the debt, Hi-Tech had 545.45 million shares outstanding and a market capitalisation of $34.91billion.Assume perfect capital markets. Use the option data from 15 Jan, 2020 in the following figure to determine:

i.Hi-Tech's firm value after debt issuance;

ii.the equity value after debt issuance; and

iii.the market value of debt and cost of debt.

(6 marks)

Price

$64

Jan 15 2020

Vol 256,006

Calls

Bid ($)

Ask ($)

Open Interest

22 Jul 25.0

60

63

100

22 Jul 30.0

56

57

82

22 Jul 35.0

50

54

172

22 Jul 40.0

44

46

103

22 Jul 45.0

30

33

98

22 Jul 50.0

24

26

408

22 Jul 55.0

22

23

63

22 Jul 60.0

20

22

99

22 Jul 65.0

18

19

269

22 Jul 70.0

16

19

66

22 Jul 75.0

16

18

88

22 Jul 80.0

15

16

2513

Hint: Use the mid-point of bid and ask as the call value