fm17 24 - ) = 0.8303 and V = $2.1964 million. This leaves...

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Mini Case: 17 - 24 This option can be valued with the Black-Scholes Option Pricing Model: V = PN(D 1 ) – Xe -RT N(D 2 ) where D 1 = [ln(P/X) + (r + 0.5 σ 2 )T]/[ σ T 0.5 ] D 2 = D 1 - σ T 0.5 And n() is the cumulative normal distribution function, from either appendix a in the back of the text, or the NORMSDIST() function in excel. in this case, P = $4 X = $2 σ = 0.60 T = 1.0 R = 0.06 and calculating, D 1 = 1.552 D 2 = 0.9552 N(D 1 ) = 0.9491 N(D 2
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Unformatted text preview: ) = 0.8303 and V = $2.1964 million. This leaves debt value of $4 million - $2.1964 million = $1.8036 million. The yield on this debt is calculated as Price = (Face Value)/(1+Yield) N so that Yield = [Face Value/Price] 1/N 1.0 = [2.0/1.8036] 1.0 = 10.89% In this case, the value of the debt must be $1.8036 million, and it is yielding 10.89%. The value of the equity is $2.1964 million....
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