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Please provide detail solution within the attached excel worksheet showing all formulas and solutions.

Success Future Value Firm Failure Future Value Firm Current Value Strike PriceZero Coupon Bond Value Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outstanding Success Future Value Firm 2 Failure Future Value Firm 2 Current Value 2 Homework $ 350,000,000.00 $ 225,000,000.00 $ 265,000,000.00 $ 295,000,000.00 1.00 8% 1.00 750,000.00 $ 385,000,000.00 $ 210,000,000.00 $ 265,000,000.00 Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 49% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ - Total value of equity at T1 $ 85,000,000.00 Present value current value of equity Answer a) T1 value/1.08 $ 78,703,703.70 $ 104.94 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 piration of debt. W.note 1 W.note 2 Solution Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time expiration of debt. Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Value at expiration pay off at expiration 49% $ 280,000,000.00 $ 50,000,000.00 51% $ 190,000,000.00 $ - Probaility UP Probabilty down Total value of equity at T1 $ Present value 50,000,000.00 T1 value/1.08 current value of equity $ Answer a) We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ b) $ 157.41 230,000,000.00 78,703,703.70 151,296,296.30 price per share is simply total equity value divided by no of share c) 46,728,971.96 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 315,000,000.00 $ 85,000,000.00 56% $ 175,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 85,000,000.00 Present value T1 value/1.08 current value of equity $ We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ d) 230,000,000.00 78,703,703.70 151,296,296.30 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework $ $ $ $ Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outsta Success Future Value Firm 2 $ Failure Future Value Firm 2 $ Current Value 2 $ 280,000,000.00 190,000,000.00 230,000,000.00 260,000,000.00 1.00 7% 1.00 500,000.00 315,000,000.00 175,000,000.00 230,000,000.00 78,703,703.70 Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value (Strike Price) Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outstanding Success Future Value Firm 2 Failure Future Value Firm 2 Current Value 2 Homework $ $ $ $ $ $ $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 Value of Company $ 350,000,000.00 $ $ Equity Holders Call Option with a strike price of $295 $ 85,000,000.00 ? $ - 265,000,000.00 265,000,000.00 Percentage Increase (350/265)-1 Percentage Decrease (225/265)-1 0.320754717 -0.1509433962 Risk-free rate = (ProbabilityRise)(ReturnRise) + (ProbabilityFall)(ReturnFall) Risk-free rate = (ProbabilityRise)(ReturnRise) + (1 - ProbabilityRise)(ReturnFall) 8% Probability Rise * .3207 This is where I get stuck + (1-Probabilty Rise)*(-.1509) Need the probablity rise and fail to calculate the expected payoff at expiration Formuala would be : Expected Payoff at Expiration = (Probabllity Rise)* (Expeccted Equity Call $85,000,000 CellF18) + (probablity fail)* From there would take the result of the Expected Payoff at Expiration and divide by 1.08 form the Tbill rate of 8% VL= Debt + Equity $ The remaining is simply plugging the numbers 265,000,000.00 =Debt + Equity 5 ail)* 0 Cell F20) Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 49% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ - Total value of equity at T1 $ 85,000,000.00 Present value current value of equity Answer a) T1 value/1.08 $ 78,703,703.70 $ 104.94 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 piration of debt. W.note 1 W.note 2 Solution Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time expiration of debt. Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Value at expiration pay off at expiration 49% $ 280,000,000.00 $ 50,000,000.00 51% $ 190,000,000.00 $ - Probaility UP Probabilty down Total value of equity at T1 $ Present value 50,000,000.00 T1 value/1.08 current value of equity $ Answer a) We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ b) $ 157.41 230,000,000.00 78,703,703.70 151,296,296.30 price per share is simply total equity value divided by no of share c) 46,728,971.96 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 315,000,000.00 $ 85,000,000.00 56% $ 175,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 85,000,000.00 Present value T1 value/1.08 current value of equity $ We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ d) 230,000,000.00 78,703,703.70 151,296,296.30 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework $ $ $ $ Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outsta Success Future Value Firm 2 $ Failure Future Value Firm 2 $ Current Value 2 $ 280,000,000.00 190,000,000.00 230,000,000.00 260,000,000.00 1.00 7% 1.00 500,000.00 315,000,000.00 175,000,000.00 230,000,000.00 78,703,703.70 Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value (Strike Price) Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outstanding Success Future Value Firm 2 Failure Future Value Firm 2 Current Value 2 Homework $ $ $ $ $ $ $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 Value of Company $ 350,000,000.00 $ $ Equity Holders Call Option with a strike price of $295 $ 85,000,000.00 ? $ - 265,000,000.00 265,000,000.00 Percentage Increase (350/265)-1 Percentage Decrease (225/265)-1 0.320754717 -0.1509433962 Risk-free rate = (ProbabilityRise)(ReturnRise) + (ProbabilityFall)(ReturnFall) Risk-free rate = (ProbabilityRise)(ReturnRise) + (1 - ProbabilityRise)(ReturnFall) 8% Probability Rise * .3207 This is where I get stuck + (1-Probabilty Rise)*(-.1509) Need the probablity rise and fail to calculate the expected payoff at expiration Formuala would be : Expected Payoff at Expiration = (Probabllity Rise)* (Expeccted Equity Call $85,000,000 CellF18) + (probablity fail)* From there would take the result of the Expected Payoff at Expiration and divide by 1.08 form the Tbill rate of 8% VL= Debt + Equity $ The remaining is simply plugging the numbers 265,000,000.00 =Debt + Equity 5 ail)* 0 Cell F20) Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 48.96% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ - Total value of equity at T1 $ 85,000,000.00 Present value current value of equity Answer a) T1 value/1.08 $ 78,703,703.70 $ 104.94 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 piration of debt. W.note 1 W.note 2 Solution Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time expiration of debt. Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Value at expiration pay off at expiration 49% $ 280,000,000.00 $ 50,000,000.00 51% $ 190,000,000.00 $ - Probaility UP Probabilty down Total value of equity at T1 $ Present value 50,000,000.00 T1 value/1.08 current value of equity $ Answer a) We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ b) $ 157.41 230,000,000.00 78,703,703.70 151,296,296.30 price per share is simply total equity value divided by no of share c) 46,728,971.96 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 315,000,000.00 $ 85,000,000.00 56% $ 175,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 85,000,000.00 Present value T1 value/1.08 current value of equity $ We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ d) 230,000,000.00 78,703,703.70 151,296,296.30 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework $ $ $ $ Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outsta Success Future Value Firm 2 $ Failure Future Value Firm 2 $ Current Value 2 $ 280,000,000.00 190,000,000.00 230,000,000.00 260,000,000.00 1.00 7% 1.00 500,000.00 315,000,000.00 175,000,000.00 230,000,000.00 78,703,703.70 Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value (Strike Price) Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outstanding Success Future Value Firm 2 Failure Future Value Firm 2 Current Value 2 Homework $ $ $ $ $ $ $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 Value of Company $ $ $ 350,000,000.00 265,000,000.00 265,000,000.00 Percentage Increase (350/265)-1 Percentage Decrease (225/265)-1 Equity Holders Call Option with a strike price of $2 $ 85,000,000.00 ? $ - 0.320754717 -0.1509433962 Risk-free rate = (ProbabilityRise)(ReturnRise) + (ProbabilityFall)(ReturnFall) Risk-free rate = (ProbabilityRise)(ReturnRise) + (1 - ProbabilityRise)(ReturnFall) This is where I get stuck 8% Probability Rise * .3207 + 0.08 0.3207X-0.1509+0.1509X 0.08 0.4716X-0.1509 Solving for X u will get probability rise 49% (1-Probabilty Rise)*(-.1509) Need the probablity rise and fail to calculate the expected payoff at expiration Formuala would be : Expected Payoff at Expiration = (Probabllity Rise)* (Expeccted Equity Call $85,000,000 CellF18) + (probablity fail)* From there would take the result of the Expected Payoff at Expiration and divide by 1.08 form the Tbill rate of 8% VL= Debt + Equity $ The remaining is simply plugging the numbers 265,000,000.00 =Debt + Equity ice of $295 blity fail)* 0 Cell F20) Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 49% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ - Total value of equity at T1 $ 85,000,000.00 Present value current value of equity Answer a) T1 value/1.08 $ 78,703,703.70 $ 104.94 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 piration of debt. W.note 1 W.note 2 Solution Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time expiration of debt. Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Value at expiration pay off at expiration 49% $ 280,000,000.00 $ 50,000,000.00 51% $ 190,000,000.00 $ - Probaility UP Probabilty down Total value of equity at T1 $ Present value 50,000,000.00 T1 value/1.08 current value of equity $ Answer a) We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ b) $ 157.41 230,000,000.00 78,703,703.70 151,296,296.30 price per share is simply total equity value divided by no of share c) 46,728,971.96 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 315,000,000.00 $ 85,000,000.00 56% $ 175,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 85,000,000.00 Present value T1 value/1.08 current value of equity $ We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ d) 230,000,000.00 78,703,703.70 151,296,296.30 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework $ $ $ $ Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outsta Success Future Value Firm 2 $ Failure Future Value Firm 2 $ Current Value 2 $ 280,000,000.00 190,000,000.00 230,000,000.00 260,000,000.00 1.00 7% 1.00 500,000.00 315,000,000.00 175,000,000.00 230,000,000.00 78,703,703.70 Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value (Strike Price) Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outstanding Success Future Value Firm 2 Failure Future Value Firm 2 Current Value 2 Homework $ $ $ $ $ $ $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 Value of Company $ 350,000,000.00 $ $ Equity Holders Call Option with a strike price of $295 $ 85,000,000.00 ? $ - 265,000,000.00 265,000,000.00 Percentage Increase (350/265)-1 Percentage Decrease (225/265)-1 0.320754717 -0.1509433962 Risk-free rate = (ProbabilityRise)(ReturnRise) + (ProbabilityFall)(ReturnFall) Risk-free rate = (ProbabilityRise)(ReturnRise) + (1 - ProbabilityRise)(ReturnFall) 8% Probability Rise * .3207 This is where I get stuck + (1-Probabilty Rise)*(-.1509) Need the probablity rise and fail to calculate the expected payoff at expiration Formuala would be : Expected Payoff at Expiration = (Probabllity Rise)* (Expeccted Equity Call $85,000,000 CellF18) + (probablity fail)* From there would take the result of the Expected Payoff at Expiration and divide by 1.08 form the Tbill rate of 8% VL= Debt + Equity $ The remaining is simply plugging the numbers 265,000,000.00 =Debt + Equity 5 ail)* 0 Cell F20) Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 49% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ Total value of equity at T1 $ In million dolor 85,000,000.00 Value Pay off At T=1 Present value T1 value/1.08 current value of equity $ 350 78,703,703.70 85 85 225 -40 0 success 265 Answer a) T=0 failure We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) $ 104.94 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Value At T=1 385 Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 120 210 -55 0 265 T=0 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 120 success We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Pay off failure piration of debt. Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 49% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ - Total value of equity at T1 $ 85,000,000.00 Present value current value of equity Answer a) T1 value/1.08 $ 78,703,703.70 $ 104.94 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 piration of debt. W.note 1 W.note 2 Solution Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time expiration of debt. Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Value at expiration pay off at expiration 49% $ 280,000,000.00 $ 50,000,000.00 51% $ 190,000,000.00 $ - Probaility UP Probabilty down Total value of equity at T1 $ Present value 50,000,000.00 T1 value/1.08 current value of equity $ Answer a) We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ b) $ 157.41 230,000,000.00 78,703,703.70 151,296,296.30 price per share is simply total equity value divided by no of share c) 46,728,971.96 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 315,000,000.00 $ 85,000,000.00 56% $ 175,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 85,000,000.00 Present value T1 value/1.08 current value of equity $ We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ d) 230,000,000.00 78,703,703.70 151,296,296.30 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework $ $ $ $ Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outsta Success Future Value Firm 2 $ Failure Future Value Firm 2 $ Current Value 2 $ 280,000,000.00 190,000,000.00 230,000,000.00 260,000,000.00 1.00 7% 1.00 500,000.00 315,000,000.00 175,000,000.00 230,000,000.00 78,703,703.70 Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value (Strike Price) Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outstanding Success Future Value Firm 2 Failure Future Value Firm 2 Current Value 2 Homework $ $ $ $ $ $ $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 Value of Company $ 350,000,000.00 $ $ Equity Holders Call Option with a strike price of $295 $ 85,000,000.00 ? $ - 265,000,000.00 265,000,000.00 Percentage Increase (350/265)-1 Percentage Decrease (225/265)-1 0.320754717 -0.1509433962 Risk-free rate = (ProbabilityRise)(ReturnRise) + (ProbabilityFall)(ReturnFall) Risk-free rate = (ProbabilityRise)(ReturnRise) + (1 - ProbabilityRise)(ReturnFall) 8% Probability Rise * .3207 This is where I get stuck + (1-Probabilty Rise)*(-.1509) Need the probablity rise and fail to calculate the expected payoff at expiration Formuala would be : Expected Payoff at Expiration = (Probabllity Rise)* (Expeccted Equity Call $85,000,000 CellF18) + (probablity fail)* From there would take the result of the Expected Payoff at Expiration and divide by 1.08 form the Tbill rate of 8% VL= Debt + Equity $ The remaining is simply plugging the numbers 265,000,000.00 =Debt + Equity 5 ail)* 0 Cell F20) Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 49% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ - Total value of equity at T1 $ 85,000,000.00 Present value current value of equity Answer a) T1 value/1.08 $ 78,703,703.70 $ 104.94 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 piration of debt. W.note 1 W.note 2 Solution Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time expiration of debt. Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Value at expiration pay off at expiration 49% $ 280,000,000.00 $ 50,000,000.00 51% $ 190,000,000.00 $ - Probaility UP Probabilty down Total value of equity at T1 $ Present value 50,000,000.00 T1 value/1.08 current value of equity $ Answer a) We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ b) $ 157.41 230,000,000.00 78,703,703.70 151,296,296.30 price per share is simply total equity value divided by no of share c) 46,728,971.96 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 315,000,000.00 $ 85,000,000.00 56% $ 175,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 85,000,000.00 Present value T1 value/1.08 current value of equity $ We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ d) 230,000,000.00 78,703,703.70 151,296,296.30 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework $ $ $ $ Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outsta Success Future Value Firm 2 $ Failure Future Value Firm 2 $ Current Value 2 $ 280,000,000.00 190,000,000.00 230,000,000.00 260,000,000.00 1.00 7% 1.00 500,000.00 315,000,000.00 175,000,000.00 230,000,000.00 78,703,703.70 Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value (Strike Price) Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outstanding Success Future Value Firm 2 Failure Future Value Firm 2 Current Value 2 Homework $ $ $ $ $ $ $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 Value of Company $ 350,000,000.00 $ $ Equity Holders Call Option with a strike price of $295 $ 85,000,000.00 ? $ - 265,000,000.00 265,000,000.00 Percentage Increase (350/265)-1 Percentage Decrease (225/265)-1 0.320754717 -0.1509433962 Risk-free rate = (ProbabilityRise)(ReturnRise) + (ProbabilityFall)(ReturnFall) Risk-free rate = (ProbabilityRise)(ReturnRise) + (1 - ProbabilityRise)(ReturnFall) 8% Probability Rise * .3207 This is where I get stuck + (1-Probabilty Rise)*(-.1509) Need the probablity rise and fail to calculate the expected payoff at expiration Formuala would be : Expected Payoff at Expiration = (Probabllity Rise)* (Expeccted Equity Call $85,000,000 CellF18) + (probablity fail)* From there would take the result of the Expected Payoff at Expiration and divide by 1.08 form the Tbill rate of 8% VL= Debt + Equity $ The remaining is simply plugging the numbers 265,000,000.00 =Debt + Equity 5 ail)* 0 Cell F20) Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 48.96% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ - Total value of equity at T1 $ 85,000,000.00 Present value current value of equity Answer a) T1 value/1.08 $ 78,703,703.70 $ 104.94 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 piration of debt. W.note 1 W.note 2 Solution Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time expiration of debt. Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Value at expiration pay off at expiration 49% $ 280,000,000.00 $ 50,000,000.00 51% $ 190,000,000.00 $ - Probaility UP Probabilty down Total value of equity at T1 $ Present value 50,000,000.00 T1 value/1.08 current value of equity $ Answer a) We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ b) $ 157.41 230,000,000.00 78,703,703.70 151,296,296.30 price per share is simply total equity value divided by no of share c) 46,728,971.96 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 315,000,000.00 $ 85,000,000.00 56% $ 175,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 85,000,000.00 Present value T1 value/1.08 current value of equity $ We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ d) 230,000,000.00 78,703,703.70 151,296,296.30 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework $ $ $ $ Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outsta Success Future Value Firm 2 $ Failure Future Value Firm 2 $ Current Value 2 $ 280,000,000.00 190,000,000.00 230,000,000.00 260,000,000.00 1.00 7% 1.00 500,000.00 315,000,000.00 175,000,000.00 230,000,000.00 78,703,703.70 Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value (Strike Price) Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outstanding Success Future Value Firm 2 Failure Future Value Firm 2 Current Value 2 Homework $ $ $ $ $ $ $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 Value of Company $ $ $ 350,000,000.00 265,000,000.00 265,000,000.00 Percentage Increase (350/265)-1 Percentage Decrease (225/265)-1 Equity Holders Call Option with a strike price of $2 $ 85,000,000.00 ? $ - 0.320754717 -0.1509433962 Risk-free rate = (ProbabilityRise)(ReturnRise) + (ProbabilityFall)(ReturnFall) Risk-free rate = (ProbabilityRise)(ReturnRise) + (1 - ProbabilityRise)(ReturnFall) This is where I get stuck 8% Probability Rise * .3207 + 0.08 0.3207X-0.1509+0.1509X 0.08 0.4716X-0.1509 Solving for X u will get probability rise 49% (1-Probabilty Rise)*(-.1509) Need the probablity rise and fail to calculate the expected payoff at expiration Formuala would be : Expected Payoff at Expiration = (Probabllity Rise)* (Expeccted Equity Call $85,000,000 CellF18) + (probablity fail)* From there would take the result of the Expected Payoff at Expiration and divide by 1.08 form the Tbill rate of 8% VL= Debt + Equity $ The remaining is simply plugging the numbers 265,000,000.00 =Debt + Equity ice of $295 blity fail)* 0 Cell F20) Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 49% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ - Total value of equity at T1 $ 85,000,000.00 Present value current value of equity Answer a) T1 value/1.08 $ 78,703,703.70 $ 104.94 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 piration of debt. W.note 1 W.note 2 Solution Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time expiration of debt. Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder Value of equity at to Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Value at expiration pay off at expiration 49% $ 280,000,000.00 $ 50,000,000.00 51% $ 190,000,000.00 $ - Probaility UP Probabilty down Total value of equity at T1 $ Present value 50,000,000.00 T1 value/1.08 current value of equity $ Answer a) We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ b) $ 157.41 230,000,000.00 78,703,703.70 151,296,296.30 price per share is simply total equity value divided by no of share c) 46,728,971.96 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 315,000,000.00 $ 85,000,000.00 56% $ 175,000,000.00 0 Probaility UP Probabilty down Total value of equity at T1 $ 85,000,000.00 Present value T1 value/1.08 current value of equity $ We know total value of firm =Debt +equity where Total value $ Total equity $ Total debt $ d) 230,000,000.00 78,703,703.70 151,296,296.30 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework $ $ $ $ Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outsta Success Future Value Firm 2 $ Failure Future Value Firm 2 $ Current Value 2 $ 280,000,000.00 190,000,000.00 230,000,000.00 260,000,000.00 1.00 7% 1.00 500,000.00 315,000,000.00 175,000,000.00 230,000,000.00 78,703,703.70 Success Future Value Firm Failure Future Value Firm Current Value Zero Coupon Bond Value (Strike Price) Zero Coupon Bond Term Tbill Rate Tbill Term Common Stock Shares Outstanding Success Future Value Firm 2 Failure Future Value Firm 2 Current Value 2 Homework $ $ $ $ $ $ $ 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 Value of Company $ 350,000,000.00 $ $ Equity Holders Call Option with a strike price of $295 $ 85,000,000.00 ? $ - 265,000,000.00 265,000,000.00 Percentage Increase (350/265)-1 Percentage Decrease (225/265)-1 0.320754717 -0.1509433962 Risk-free rate = (ProbabilityRise)(ReturnRise) + (ProbabilityFall)(ReturnFall) Risk-free rate = (ProbabilityRise)(ReturnRise) + (1 - ProbabilityRise)(ReturnFall) 8% Probability Rise * .3207 This is where I get stuck + (1-Probabilty Rise)*(-.1509) Need the probablity rise and fail to calculate the expected payoff at expiration Formuala would be : Expected Payoff at Expiration = (Probabllity Rise)* (Expeccted Equity Call $85,000,000 CellF18) + (probablity fail)* From there would take the result of the Expected Payoff at Expiration and divide by 1.08 form the Tbill rate of 8% VL= Debt + Equity $ The remaining is simply plugging the numbers 265,000,000.00 =Debt + Equity 5 ail)* 0 Cell F20) Solution W.note 1 Since Project is financed with both debt and equity it can be thought as equity share holder have call option on asset of company with a strike price equal to debt face value i.e 295 at time exp Equity share holder will exercise there call option if value increases or else will let it expire off and paythe procceds to debt holder W.note 2 Using risk neutraliztion method we can calulate probability Formula is (Spotprice(1+rf)-Low value)/(high value -low value) Using above concept and formula Probaility is Probaility UP Probabilty down Value at expiration pay off at expiration 49% $ 350,000,000.00 $ 85,000,000.00 51% $ 225,000,000.00 $ Total value of equity at T1 $ In million dolor 85,000,000.00 Value Pay off At T=1 Present value T1 value/1.08 current value of equity $ 350 78,703,703.70 85 85 225 -40 0 success 265 Answer a) T=0 failure We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 78,703,703.70 Total debt $ 186,296,296.30 b) price per share is simply total equity value divided by no of share c) $ 104.94 Using same concept used in above solution we can calculate equity value Value at expiration Pay of 44% $ 385,000,000.00 $ 120,000,000.00 56% $ 210,000,000.00 0 Probaility UP Probabilty down Value At T=1 385 Total value of equity at T1 $ 120,000,000.00 Present value T1 value/1.08 current value of equity $ 111,111,111.11 350,000,000.00 225,000,000.00 265,000,000.00 295,000,000.00 1.00 8% 1.00 750,000.00 385,000,000.00 210,000,000.00 265,000,000.00 120 210 -55 0 265 T=0 Bond holder will prefer conservative project as their pay off is maximum in case of conservative project in case of failure of project Homework Success Fut $ Failure Fut $ Current Val $ Zero Coupo $ Zero Coupo Tbill Rate Tbill Term Common Sto Success Fut $ Failure Fut $ Current Val $ 120 success We know total value of firm =Debt +equity where Total value $ 265,000,000.00 Total equity $ 111,111,111.11 Total debt $ 153,888,888.89 d) Pay off failure piration of debt