Find the values of equity as call option

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Reference no: EM132056737

Find the values of equity as a call option and default as a put option on assets of a company. The company is formed with 3120 of equity capital and 9360 of debt borrowed at 10% to be repaid in a year. Assume the liquidation value of assets at the end of the year has four possible outcomes: $7000 with probability 0.1, $9000 with probability 0.2, $15000 with probability 0.4 and $20000 with probability 0.3. Cost of capital on assets is 15% and cost of capital on equity is 18%. Find the following:

a) Current fair value of assets using basic ideas of finance.

b) Current fair value of equity using ideas of options and basic finance.

c) Current fair value of debt using basic ideas of finance.

d) Cost of capital on debt (express percent as a number) using basic finance ideas.

e) Current fair value of promised debt repayment using cost of debt.

f) Current fair value of default using the idea of options.

Reference no: EM132056737

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