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Company X" has the following financial structure at time (: Debt $3m (current book value) Equity fom (issued share capital) The debt is a zero-coupon bond with face value $5m that is repayable at par at time 10. There are 400,000 shares in circulation. (i) Explain how the Merton model could be used to value shares in Company X. [3] (ii) Assuming that the debt is repaid directly from the company's funds at that time, state the share price at time 10 if the total value of Company X at that time is: (a) $15m (b) $4m [2] [Total 5]The covariance is a measure which reflects both the variance of an asset's returns and the tendency of those returns to move up and down at the same time other assets move up or down. The covariance between two asset's return can be given by the following formula: Cov (AB) = E(RM - E(RA ))(RE - E( RB ))P. ...(3.g) Where Cov(AB) is the covariance between And B RAi is the return on asset A under the Ith state. E(RA) is the expected return of A RBi is the return on asset B under the ith state E(RA) is the expected return of B Pi is the probability of the ith state. The correlation coefficient can be given by the following formula. Cov (AB) Y' AB = ...(3.g) Illustration: Four assets have the following distribution of returns. Probability Rate of return (%) Occurrence A B C D 0.1 10.0% 6.0% 14.0% 2.0% 0.2 10.0 8.0 12.0 6.0 0.4 10.0 10.0 10.0 90 0.2 10.0 120 8.0 15.0 0.1 10.0 14.0 6.0 20.0 REQUIRED: L. Compute the expected return and standard deviation of each asset. b. Compute the covariance of asset i. A and B ii. B and C ifi. B and D C. Compute the correlation coefficient of the combination of assets in b above