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ABC Inc. is a levered firm with asset value of $20,000. Its zero-coupon debt has a face value of $18,000 and maturity of two years.
ABC Inc. is a levered firm with asset value of $20,000. Its zero-coupon debt has a face value of $18,000 and maturity of two years. The asset value will either increase or decrease 10% in the first year and 25% in the second year. The risk-free rate is 4% in the first year and 6% in the second year. a) Using the replicating portfolio approach for call options (only use call options), calculate the current market value of the equity. b) Using the risk neutral probability approach for put options (only use put options), calculate the current market value of the debt. c) What is the cost of debt? ABC Inc. is a levered firm with asset value of $20,000. Its zero-coupon debt has a face value of $18,000 and maturity of two years. The asset value will either increase or decrease 10% in the first year and 25% in the second year. The risk-free rate is 4% in the first year and 6% in the second year. a) Using the replicating portfolio approach for call options (only use call options), calculate the current market value of the equity. b) Using the risk neutral probability approach for put options (only use put options), calculate the current market value of the debt. c) What is the cost of debt
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