SansaStark PLC is a listed company with limited liability. It currently has assets valued at 350 million (in terms of the sum of the market values of its debt and equity). It has a large amount of (non-convertible) debt with a redemption value of 200 million, with a zero-coupon and a remaining term to maturity of five years. The value of the firms assets is quite volatile with an asset return having an estimated standard deviation of 40%. The annual riskfree interest rate is expected to remain constant over the next five years at 4%. It is reasonable to assume that over the foreseeable future the company will continue to pay no dividends.

Required:

1. 1. Using the BlackScholes option-pricing model, calculate:
      1. the value of the equity and debt of the company and the value of the risk-free debt with the same redemption value and maturity as the companys debt;
      2. the value of a limited liability for SansaStark PLC and clearly explain the benefits of the limited liability for shareholders and, more generally, for the economy.
2. b-Now suppose that SansaStark PLC undertakes the actions outlined below in points (i) and (ii). In each case, recalculate the value of the limited liability and explain why the new values are different (or not) compared to the value of limited liability in the baseline scenario outlined in (a). Also, explain why shareholders and debtholders are better off (or not) in each case.a)-The company pays special dividends financed by liquidating assets for a total value of 50 million. the b-The company pays dividends financed by issuing new debt worth 50 million.