Higgs Bassoon Corporation is a custom manufacturer of bassoons and other wind instruments. Its current value of operations, which is also its value of debt plus equity, is estimated to be $200 million. Higgs has $110 million face value, zero coupon debt that is due in 3 years. The risk-free rate is 5%, and the standard deviation of returns for similar companies is 60%. The owners of Higgs Bassoon view their equity investment as an option and would like to know the value of their investment. 10 12 a. Using the Black-Scholes Option Pricing Model, how much is the equity worth? 13 14 Black-Scholes Option Pricing Model 15 Total Value of Firm 6 Face Value of Debt 17 Risk Free rate 18 Maturity of debt (years) 19 Standard Dev 20 di 21 d2 22 N(d1) 23 N(d2) 24 Call PriceEquity Value 25 26 b. How much is the debt worth today? What is its yield? this is the current value of operations this is sigma--also known as volatility use the formula from the text use the formula from the text use the Normsdist function in the function wizard million million 28 Debt valueTotal Value Equity Value 29 Debt yield 30 31 | c. How much would the equity value and the yield on the debt change if Fethe's 32 management were able to use risk management techniques to reduce its volatility to 3 45 percent? Can you explain this? million million million Equity value at 60% volatility 36 Equity value at 45% volatility 37 Percent change 38 39 40 d. Graph the cost of debt versus the face value of debt for values of the face value from $0.5 to $8 million Cost of Debt hint: use a data table 42 Face Value of Debt 43 10 45 40 47 48 49 50 60 80 90 100 110 120 130 140 150 160 52 53 56 58 59 60 61