17-10 a. The inputs to the Black and Scholes option pricing model are P = 5, X = 2, rRF= 6%, σ= 50%, and t = 2 years. Given these inputs, the value of a call option is calculated as: tt]2/r[)X/Pln(d2RF1σσ++== 8191.125.02]2/5.006.0[)2/5ln(2=++. tdd12σ−== 1120.125.0819.1=−. Using Excel’s Normsdist function N(d1) = 0.9656, and N(d2) = 0.8669. This gives a value of the call option equal to: = . )][N(dXe)]P[N(dV2t-r1RF−=3.29[0.8669]2e5[0.9656])2(06.0-=−b. The debt must therefore be worth 5-3.29 = $1.71 million. Its yield is
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