You have been asked to analyze the value of equity in a company that has the following features: The earnings before interest and taxes is $25 million, and the corporate tax rate is 40%. The earnings are expected to grow 4% a year in perpetuity, and the return on capital is 10%. The cost of capital of comparable firms is 9%. The firm has two types of debt outstandingtwo-year zero coupon bonds with a face value of $250 million and bank debt with 10 years to maturity with a face value of $250 million. (The duration of this debt is four years.) The firm is in two businessesfood processing and auto repair. The average standard deviation in firm value for firms in food processing is 25%, whereas the standard deviation for firms in auto repair is 40%. The correlation between the businesses is 0.5. The riskless rate is 7%.

Use the option pricing model to value equity as an option.