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# The company lives for only one period it promises to

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The company lives for only one period. It promises to repay 18 to the debtholders next period. a) What is the value of debt? b) What is the expected yield of the debt? How does it compare with the riskfree rate? c) What is the value of equity? d) Suppose the company receives a government loan guarantee. What is the loan guarantee worth? What is the value of the company after it receives the loan 1

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18 48 128 30 80 50 guarantee? Why is the company worth more? 5. Consider an American put option written on a non-dividend paying stock. The strike price is 50. The put will expire in two years. The stock price follows a two-period binomial as in the graph. At each date, the natural probability that the stock price increases is one half. The stock is currently selling at 50. A two-year annual coupon bond with annual coupon rate of 10% is selling at par. (a) What is the price of the American put option? (b) What is the price of an American call option written on the same stock with the same strike price and expiration date? (c) Prove or disprove: the put-call parity holds for American puts and American calls. 2
• Fall '12
• Stefina
• Economics, effective annual rate, Strike price

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