Youre the sole shareholder of a private company that made $1m EBITDA last year. Based on similar firms EV/EBITDA ratios of 6, your firms enterprise value is $6m. Your firm currently has very little cash so the asset value is also $6m. Your firm is not expected to pay dividends or buybacks for the next 5 years, same as other firms in your industry.

Your firm has a single liability which is a $4m face value zero-coupon bond due in 5 years.

You estimate that the standard deviation of continuously compounded returns on your firms assets is 40% pa.

Zero coupon government bonds maturing in 5 years yield 5% pa given as a continuously compounding rate.

You attempt to use the Merton model based on the Black-Scholes option pricing formula to value your firms debt and equity.

Which of the below statements about your firm is NOT correct? All figures have been rounded to 4 decimal places.

Select one:

a.The equity value is $3.3783m.

b.The debt value is $2.6217m.

c.The debts promised YTM is 8.4490% pa as a continuously compounded rate.

d.If the value of the firms assets were to suddenly increase by $1m, the equity value would increase by $0.5473m or more.

e.The risk-neutral probability that the firm will be able to pay its debt in 5 years is 61.2415%.