FINANCIAL MANAGEMENT
FINANCIAL MANAGEMENT
16th Edition
ISBN: 9781337902601
Author: Brigham
Publisher: CENGAGE L
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Chapter 15, Problem 10MC

Liu Industries is a highly levered firm. Suppose there is a large probability that Liu will default on its debt. The value of Liu’s operations is $4 million. The firm’s debt consists of 1-year, zero coupon bonds with a face value of $2 million. Liu’s volatility, σ, is 0.60, and the risk-free rate rRF is 6%.

Because Liu’s debt is risky, its equity is like a call option and can be valued with the Black-Scholes Option Pricing Model (OPM). (See Chapter 8 for details of the OPM.)

  1. (1) What are the values of Liu’s stock and debt? What is the yield on the debt?
  2. (2) What are the values of Liu’s stock and debt for volatilities of 0.40 and 0.80? What are yields on the debt?
  3. (3) What incentives might the manager of Liu have if she understands the relationship between equity value and volatility? What might debtholders do in response?
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It is now January 1. You plan to make a total of 5 deposits of $500 each, one every 6 months, with the first payment being made today. The bank pays a nominal interest rate of 14% but uses semiannual compounding. You plan to leave the money in the bank for 10 years. Round your answers to the nearest cent. 1. How much will be in your account after 10 years? 2. You must make a payment of $1,280.02 in 10 years. To get the money for this payment, you will make five equal deposits, beginning today and for the following 4 quarters, in a bank that pays a nominal interest rate of 14% with quarterly compounding. How large must each of the five payments be?
Don't used hand raiting and don't used Ai solution
Don't used Ai solution and don't used hand raiting

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