# fm17 24 - = 0.8303 and V = \$2.1964 million This leaves debt...

This preview shows page 1. Sign up to view the full content.

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
This is the end of the preview. Sign up to access the rest of the document.

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....
View Full Document

{[ snackBarMessage ]}

Ask a homework question - tutors are online