Question 2 [10 marks] (a) Assume that as of 15 Jan 2020, Hi-Tech had no debt or cash. The firm's managers consider recapitalising the firm by issuing zero-coupon debt with a face value of $30 billion due in Jul of 2022, and using the proceeds to repurchase shares. Assume that before issuing the debt, Hi-Tech had 545.45 million shares outstanding and a market capitalisation of $34.91 billion. Assume perfect capital markets. Use the option data from 15 Jan, 2020 in the following figure to determine: i. Hi-Tech's firm value after debt issuance; ii. the equity value after debt issuance; and the market value of debt and cost of debt. (6 marks) 11. Hi-Tech Price $64 Jan 15 2020 Vol 256,006 Open Calls Bid ($) Ask ($){ Interest 22 Jul 25.04 602 632 1000 22 Jul 30.04 56 57e 82 22 Jul 35.04 504 542 1722 22 Jul 40.04 442 462 1032 22 Jul 45.00 304 332 982 22 Jul 50.00 24 26 4082 4 22 Jul 55.04 222 23e 632 22 Jul 60.04 20 22 992 22 Jul 65.04 182 192 269 22 Jul 70.04 16 194 662 22 Jul 75.04 16 18 882 22 Jul 80.00 152 16 25134 Hint: Use the mid-point of bid and ask as the call value 2 (b) Express the position of a debt holder in terms of put options. (2 marks) (c) Build your answers on part (b) of this question, use option theory to explain the debt- overhang problem, or, how managers could decide to forgo projects with positive NPVs when the firm has a high level of financial leverage. (Word limit: 100) (2 marks) Question 2 [10 marks] (a) Assume that as of 15 Jan 2020, Hi-Tech had no debt or cash. The firm's managers consider recapitalising the firm by issuing zero-coupon debt with a face value of $30 billion due in Jul of 2022, and using the proceeds to repurchase shares. Assume that before issuing the debt, Hi-Tech had 545.45 million shares outstanding and a market capitalisation of $34.91 billion. Assume perfect capital markets. Use the option data from 15 Jan, 2020 in the following figure to determine: i. Hi-Tech's firm value after debt issuance; ii. the equity value after debt issuance; and the market value of debt and cost of debt. (6 marks) 11. Hi-Tech Price $64 Jan 15 2020 Vol 256,006 Open Calls Bid ($) Ask ($){ Interest 22 Jul 25.04 602 632 1000 22 Jul 30.04 56 57e 82 22 Jul 35.04 504 542 1722 22 Jul 40.04 442 462 1032 22 Jul 45.00 304 332 982 22 Jul 50.00 24 26 4082 4 22 Jul 55.04 222 23e 632 22 Jul 60.04 20 22 992 22 Jul 65.04 182 192 269 22 Jul 70.04 16 194 662 22 Jul 75.04 16 18 882 22 Jul 80.00 152 16 25134 Hint: Use the mid-point of bid and ask as the call value 2 (b) Express the position of a debt holder in terms of put options. (2 marks) (c) Build your answers on part (b) of this question, use option theory to explain the debt- overhang problem, or, how managers could decide to forgo projects with positive NPVs when the firm has a high level of financial leverage. (Word limit: 100) (2 marks)
