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1 of 3 8/13/2006 Chapter 17. Solution to Ch 17 P11 Build a Model a. Using the Black-Scholes Option Pricing Model, how much is Fethe's equity worth? Black-Scholes Option Pricing Model Total Value of Firm 5.00 this is the current value of operations Face Value of Debt 2.00 Risk Free rate 0.06 Maturity of debt (years) 2.00 Standard Dev. 0.50 this is sigma--also known as volatility 1.8191 use the formula from the text 1.1120 use the formula from the text 0.9656 use the Normsdist function in the function wizard 0.8669 Call Price = Equity Value $3.2900 b. How much is the debt worth today? What is its yield? Debt value = Total Value - Equity Value = $1.71 Debt yield = 8.146% Equity value at 50% volatility 3.29000 Equity value at 30% volatility 3.22910 Percent change-0.01851 a. Graph the cost of debt versus the face value of debt for values of the face value from $0.5 to $8 million. Cost of Debt Face Value of Debt 8.146% hint: use a data table 0.5 6.19% 1 6.38% 1.5 7.02% 2 8.15% 2.5 9.71% 3 11.62%11.... View Full Document