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Consider firm BCN. The current share price is $25. The firm has a zero-coupon bond outstanding with a 1-year maturity and a face value per
Consider firm BCN. The current share price is $25. The firm has a zero-coupon bond outstanding with a 1-year maturity and a face value per share of $25. The risk-free rate is 3% pa, continuously- compounded. You may assume the assumptions of the Merton credit risk model hold.
- a)What is the current price of a default-free, one-period, zero-coupon bond per $100 par value?
- b)What are the minimum and maximum values of the assets per share for firm BCN?
From here on, assume the volatility of equity returns is 90% pa.
c) Write down the equation for the firm's share price as a function of the firm's asset value per share, A. Not all values are known yet, use appropriate symbols to denote the unknown values.
- d)Write down the equation for the relation between the firm's equity volatility (E) and the firm's asset volatility ().Not all values are known yet, use appropriate symbols to denote the unknown values.
- e)Suppose that we also know thatN(d2 ) = 0.6272 . What is the value of the firm's assets per share?
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