Question
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $18,000 that matures in one year. The current market value of
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $18,000 that matures in one year. The current market value of the firm's assets is $21,000. The standard deviation of the return on the firm's assets is 52 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. Based on the Black-Scholes model, what is the market value of the firm's debt? Based on the Black-Scholes model, what is the market value of the firm's equity? What is the firms continuously compounded cost of debt?
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