The value of a firms future cash flows is estimated at 230M. The continuously compounded risk-free rate is 3%. The duration of firms debt is 11 years. The face value of the firms debt is 280M. The volatility of firm cash flows is 0.22. The firm pays no dividends. Use the notion of equity as a call option on the value of the firm.

1. What is d1?

2. What is d2?

3. What is the value of this firms equity? (remember valuing equity as call option on value of the firm)

4. What is the value of the firms debt?

5. What should be the YTM of the firms debt?

Let the firm now accept a project that has an NPV of 10M and increases the volatility of the firm to .30. What is the new value of the firms equity?