Company I-fall's market capitalization is currently $50million . Its debt is $90 million . All their debts are due in one year. Asset volatility is 40% while expected return on asset is 14.72%.
a) According to the Merton model, what is I-fall's actual default probability?
b) If the risk free rate is 4.77% p.a., at what rate should lenders charge I-fall on their borrowings?
Assuming LGD = 0.5.
c) If the company takes on extra debt, by issuing a par bond, face value $10 million, after the bond
issuance, the interest rate lenders charge I-fa ll would increase by how much?
Assume the current debt is $90 million again .
d) If the asset volatility reduces from 40% to 30%, what is the maximum amount of debt, in par
bonds, the company can issue such that the interest rate they pay after the bond issuance is lower than or equal to the rate they pay in part b). Enter your answer in millions of dollars, and include at least
three decima l places.
Assume the current debt is $90 million and the volatility is 40% again .
e) If LGD decreases from 0.5 to 0.4, what would be the maximum amount of debt, in par bonds,
the company can issue such that the interest rate they pay after the bond issuance is lower than or equal to the interest rate they pay in part b). Enter your answer in millions of dollars, and include
at least three decima l places.