Question 41 [11 marks] Sirca Stationary Limited (SSL) has a zero-coupon debt outstanding maturing in two years. The face value of this debt is $100,000. The market value of SSL's total assets has a standard deviation (6) of 50%, and is currently sitting at $80,000. Risk-free interest rate is 5%. a) Treat shareholder equity as a call option, what is the value of SSL's shareholder equity? (Hint: use Black-Scholes option pricing model) [5 marks] b) If SSL decides to immediately halt operations, convert all assets into cash, and invest all cash in government bonds, will shareholders win or lose? [2 marks] c) Suppose SSL borrows $20,000 new debt to finance a project that has a NPV of zero. The new debt has the same security, seniority and maturity date as the existing debt. Will existing debtholders win or lose in this case? [2 marks] d) Suppose SSL takes on a new project which has a positive NPV of $20,000. SSL issues preference shares to finance this new project. Will shareholders win or lose in this case? [2 marks] + + + + + + + + Question 41 [11 marks] Sirca Stationary Limited (SSL) has a zero-coupon debt outstanding maturing in two years. The face value of this debt is $100,000. The market value of SSL's total assets has a standard deviation (6) of 50%, and is currently sitting at $80,000. Risk-free interest rate is 5%. a) Treat shareholder equity as a call option, what is the value of SSL's shareholder equity? (Hint: use Black-Scholes option pricing model) [5 marks] b) If SSL decides to immediately halt operations, convert all assets into cash, and invest all cash in government bonds, will shareholders win or lose? [2 marks] c) Suppose SSL borrows $20,000 new debt to finance a project that has a NPV of zero. The new debt has the same security, seniority and maturity date as the existing debt. Will existing debtholders win or lose in this case? [2 marks] d) Suppose SSL takes on a new project which has a positive NPV of $20,000. SSL issues preference shares to finance this new project. Will shareholders win or lose in this case? [2 marks] + + + + + + + +