Question 4 So / 270 share x Im shores = 70m Beverage maker Black & Tan is currently worth 70 per share with one million shares 540 x 1sheds 540 outstanding. Depending on demand, one year from now it will be worth either 105 or 40 per share. The risk free rate is 1%. Ef SH SL 5105x] m shares Stoom (a) What is the price of a European call option on Black & Tan with a strike price of 60 that expires in one year? (5 marks) Boca orice (b) How does volatility affects call option prices? Explain. (6 marks) (C) Suppose Black & Tan has outstanding debt with face value 50 million due in one year. What is the value of the equity of Black & Tan? (7 marks) (d) Explain how volatility affects equity prices when equity is close to default? (7 marks) Question 4 So / 270 share x Im shores = 70m Beverage maker Black & Tan is currently worth 70 per share with one million shares 540 x 1sheds 540 outstanding. Depending on demand, one year from now it will be worth either 105 or 40 per share. The risk free rate is 1%. Ef SH SL 5105x] m shares Stoom (a) What is the price of a European call option on Black & Tan with a strike price of 60 that expires in one year? (5 marks) Boca orice (b) How does volatility affects call option prices? Explain. (6 marks) (C) Suppose Black & Tan has outstanding debt with face value 50 million due in one year. What is the value of the equity of Black & Tan? (7 marks) (d) Explain how volatility affects equity prices when equity is close to default? (7 marks)