Question
how do we solve for application 8 ? This is simplified and partial version of Merton model. Firm F has debt, market value B, and
how do we solve for application 8 ?
This is simplified and partial version of Merton model.
Firm F has debt, market value B, and equity, market value S. Value of assets is A. No corporate taxes.
1.Interpreting equity as a call on the assets and using the results show that you can write S as a function of 0, L=B/S and the sensitivity of S to A.
2.Show that you can express B as a function of 0, L and .
3.How do you interpret the case =1?
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Derivatives Markets
Authors: Robert McDonald
3rd Edition
978-9332536746, 9789332536746
