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 firms assets will be worth either $14.6756m or $2.4531m in 5 years.

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

You attempt to use a one-period binomial tree 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 risk-neutral probability of an increase in the asset value from $6m to $14.6756m in 5 years is 34.8264%.

b.The equity value is $3.3246m.

c.The debt value is $3.1152m.

d.Using the no-arbitrage approach to pricing the binomial tree, the delta is 0.8734.

e.Using the no-arbitrage approach to pricing the binomial tree, shorting the equity and buying 87.34% of the firms assets will lead to a risk-free portfolio value of $2.1426m in 5 years regardless of whether the assets value rises to $14.6756m or falls to $2.4531m.