Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 16, Problem 12P
a)
Summary Introduction
To determine: Company F’s equity worth by using Black-Scholes option model.
b)
Summary Introduction
To determine: Current worth of debt and yield.
c)
Summary Introduction
To discuss: Impact of equity value and yield on debt change on reducing the volatility to 30%.
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Equity Viewed as an Option
A. Fethe Inc. is a custom manufacturer of guitars, mandolins,and other stringed instruments and is located near Knoxville,Tennessee. Fethe's current value of operations, which is also its value of debt plus equity, is estimated to be $5 million. Fethe has $2 million face value, zero coupon debt that is due in 2 years. The risk-free rate is 6%, and the standard deviation of returns for companies similar to Fethe is 50%. Fethe's owners view their equity investment as an option and they would like to know the value oftheir investment.
a. Using the Black-Scholes option pricing model, how much isFethe's equity worth? In your calculations round normaldistribution values to 4 decimal places. Round your answer to twodecimal places.
$__________ million ?
b.How much is the debt worth today? What is its yield? Roundyour answer for the debt worth to two decimal places. Round youranswer for the yield on the debt to one decimal place.
Debt worth today: $…
Higgs Bassoon Corporation is a custom manufacturer of bassoons and other wind instruments. Its current value of operations, which is also its value of debt plus equity, is estimated to be $200 million. Higgs has $110 million face value, zero coupon debt that is due in 3 years. The risk-free rate is 5%, and the standard deviation of returns for similar companies is 60%. The owners of Higgs Bassoon view their equity investment as an option and would like to know the value of their investment.
Using the Black-Scholes Option Pricing Model, how much is the equity worth?
How much is the debt worth today? What is its yield?
How much would the equity value and the yield on the debt change if Fethe's management were able to use risk management techniques to reduce its volatility to 45 percent? Can you explain this?
Tescac’s assets are worth $290. It has $175 of zero-coupon debt outstanding that is due to be repaid at the end of two years. The risk-free interest rate is 5%, and the standard deviation of the returns on Tescac’s assets is 40% per year.
A. What is the value of the put option owned by shareholders?
B. What is the value of the company’s debt?C. What is the value of the company’s equity?
Chapter 16 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 16 - Prob. 1QCh. 16 - Prob. 2QCh. 16 - Prob. 3QCh. 16 - One type of leverage affects both EBIT and EPS....Ch. 16 - Prob. 5QCh. 16 - Prob. 6QCh. 16 - Prob. 7QCh. 16 - Prob. 8QCh. 16 - Prob. 9QCh. 16 - Prob. 1P
Ch. 16 - Unlevered Beta
Counts Accounting’s beta is 1.15...Ch. 16 - Premium for Financial Risk
Ethier Enterprise has...Ch. 16 - Value of Equity after Recapitalization Nichols...Ch. 16 - Stock Price after Recapitalization Lee...Ch. 16 - Prob. 6PCh. 16 - Prob. 7PCh. 16 - Capital Structure Analysis Pettit Printing Company...Ch. 16 - Optimal Capital Structure with Hamada
Beckman...Ch. 16 - WACC and Optimal Capital Structure F. Pierce...Ch. 16 - Prob. 12PCh. 16 - Prob. 1MCCh. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Prob. 4MCCh. 16 - Prob. 5MCCh. 16 - Prob. 6MCCh. 16 - What does the empirical evidence say about capital...Ch. 16 - Suppose there is a large probability that L will...Ch. 16 - What is the value of Ls stock for volatilities...
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