(ONLY NEED ANSWER TO PART D) You are the manager and sole equity owner of a highly leveraged company. All the debt will mature in one year from today. The face value of the total debt is X = $100 million. If at the maturity time the value of the company is greater than the face value of the debt, you will pay off the debt. If the value of the company is less than the face value of the debt, you will declare bankruptcy, and the debt holders will own the company.

(a) Calculate your equity value at the maturity time for each given value of the company in the spreadsheet below (Table A). Plot your equity value as a function of the company value at the maturity time. Is your equity value the payoff of some option on the company value? What type of option is it (call or put)? What is the strike price of the option?

Table A: Equity Value in One Year from Today

Company Value ($million) Your Equity Value ($Million)

20 ?

40 ?

60 ?

80 ?

100 ?

120 ?

140 ?

160 ?

180 ?

(b) Calculate the debt holders value at the maturity time for each given value of the company in the spreadsheet below (Table B). Plot the debt holders value as a function of the company value at the maturity time. Is the debt holders value the payoff of some option strategy involved with a put on the company value? What is the strategy?

[Same table as above but with debt]

(c) The (risk-free) interest rate is 5.1293% per annum. Suppose C = $40 million is todays value of a one-year call option on the company value with strike price X = 100 million. Suppose P = $20 is todays value of a one-year put option on the company value with the same strike price. Figure out todays equity value (E) and debt value (D).

(d) If the MM theory holds for this company, what is todays company value (denoted by S)? Is the MM theory consistent with the put-call parity for the options on the company value?