FM11 Ch 17 P08 Build a Model

FM11 Ch 17 P08 Build a Model - Chapter 17 Ch 17 P8 Build a...

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1 of 1 6/29/2003 Chapter 17. Ch 17 P8 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 mil Value of Debt Value of Equity Volatility Face Value of Debt
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