Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Structure model and the Black-Scholes (BS) option pricing formula. A firm has a debt of 10 million dollars with six months maturity. The firm does
Structure model and the Black-Scholes (BS) option pricing formula. A firm has a debt of 10 million dollars with six months maturity. The firm does not pay coupon before the debt maturity. This firm has 2 million outstanding number of shares with price being 2 dollars per share. The continuously com- pounded interest rate is 2% per annum. The volatility of firm value is 40%. The firm does not pay any dividend. Answer the following questions. (a) According to the BS option pricing formula. How much is the firm value? Hint: you could use solver add-in in the Excel to find the solution for a non-linear equation. (b) What is the yield to maturity of the debt? (c) The firm proposes to the debt investors to restructure the debt by con- verting them into equity. If you are an debt investor, what is the fair conversion ratio you will accept? Hint: To be fair, the value shall not change before and after the conversion. Structure model and the Black-Scholes (BS) option pricing formula. A firm has a debt of 10 million dollars with six months maturity. The firm does not pay coupon before the debt maturity. This firm has 2 million outstanding number of shares with price being 2 dollars per share. The continuously com- pounded interest rate is 2% per annum. The volatility of firm value is 40%. The firm does not pay any dividend. Answer the following questions. (a) According to the BS option pricing formula. How much is the firm value? Hint: you could use solver add-in in the Excel to find the solution for a non-linear equation. (b) What is the yield to maturity of the debt? (c) The firm proposes to the debt investors to restructure the debt by con- verting them into equity. If you are an debt investor, what is the fair conversion ratio you will accept? Hint: To be fair, the value shall not change before and after the conversion
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started