1 of 1 4/19/2010 Chapter 26. Ch 26 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 this is the current value of operations Face Value of Debt Risk Free rate Maturity of debt (years) Standard Dev. this is sigma--also known as volatility use the formula from the text use the formula from the text use the Normsdist function in the function wizard Call Price = Equity Value b. How much is the debt worth today? What is its yield? Debt value = Total Value - Equity Value = Debt yield = Equity value at 50% volatility Equity value at 30% volatility Percent change 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 hint: use a data table 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 b. Graph the values of debt and equity for volatilities from 0.10 to 0.90 when the face value of the debt is $2 milli Value of Debt
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Mathematical finance, Black–Scholes, A. Fethe