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Australian Diatomics has 10 million outstanding shares trading at $A25 per share. It also has a large amount of debt outstanding, all coming due on one year. The debt pays interest at 8 percent. It has a par (face) value of $A350 million, but is trading at a market value of only $A270 million. The one-year riskfree interest rate is 6 percent. (a) Write out the put-call parity formula for Diatomics' stick, debt, and assets. (b) What is the value of the default put given up by Diatomics; creditors? (Brealey, Myers & Allen)

Australian Diatomics has 10 million outstanding shares trading at $A25 per share. It also has a large amount of debt outstanding, all coming due on one year. The debt pays interest at 8 percent. It has a par (face) value of $A350 million, but is trading at a market value of only $A270 million. The one-year riskfree interest rate is 6 percent. (a) Write out the put-call parity formula for Diatomics' stick, debt, and assets. (b) What is the value of the default put given up by Diatomics; creditors? (Brealey, Myers & Allen)

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Australian Diatomics has 10 million outstanding shares trading at $A25 per share. It also has a large amount of debt outstanding, all coming due on one year. The debt pays interest at 8 percent. It has a par (face) value of $A350 million, but is trading at a market value of only $A270 million. The one-year riskfree interest rate is 6 percent. (a) Write out the put-call parity formula for Diatomics' stick, debt, and assets. (b) What is the value of the default put given up by Diatomics; creditors? (Brealey, Myers & Allen)
Transcribed Image Text:Australian Diatomics has 10 million outstanding shares trading at $A25 per share. It also has a large amount of debt outstanding, all coming due on one year. The debt pays interest at 8 percent. It has a par (face) value of $A350 million, but is trading at a market value of only $A270 million. The one-year riskfree interest rate is 6 percent. (a) Write out the put-call parity formula for Diatomics' stick, debt, and assets. (b) What is the value of the default put given up by Diatomics; creditors? (Brealey, Myers & Allen)
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