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Green Goose Automation is a manufacturing firm. Green Gooses current value of operations, including debt and equity, is estimated to be $500 million. Green Goose
Green Goose Automation is a manufacturing firm. Green Gooses current value of operations, including debt and equity, is estimated to be $500 million. Green Goose has $200 million face-value zero coupon debt that is due in three years. The risk-free rate is 5%, and the volatility of companies similar to Green Goose is 60%. Green Gooses performance has not been very good as compared to previous years. Because the company has debt, it will repay its loan, but the company has the option of not paying equity holders. The ability to make the decision of whether to pay or not looks very much like an option. Based on your understanding of the Black-Scholes option pricing model (OPM), calculate the following values and complete the table. (Note: Use 2.7183 as the approximate value of e in your calculations. Do not round intermediate calculations. Round final answers to two decimal places.) Values: Green Goose Automation Equity value Debt value Debt yield Green Gooses management is implementing a risk management strategy to reduce its volatility. Complete the following table, assuming that the goal is to reduce the companys volatility to 30%. (Note: Do not round intermediate calculations. Round final answers to two decimal places.) Goals: Green Goose Automation Equity value at 30% volatility Debt value at 30% volatility Debt yield at 30% volatility Complete the following sentence, assuming that Green Gooses risk management strategy is successful. If its risk management strategy is successful and Green Goose can reduce its volatility, the value of Green Gooses stock will , and the value of its debt will
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