How much is Fethe equity worth

Assignment Help Finance Basics
Reference no: EM132899320

Problem - 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 of their investment.

a. Using the Black-Scholes option pricing model, how much is Fethe's equity worth?

b. How much is the debt worth today? What is its yield?

c. How would the equity value and the yield on the debt change if Fethe's managers could use risk management techniques to reduce its volatility to 30%? Can you explain this?

Reference no: EM132899320

Questions Cloud

What is the approached used in the story : What is the approached used in the story the doll's house by Katherine Mansfield?
What role does the geek squad play in best buys : What role does the Geek Squad play in Best Buys' customer centricity approach? How does this service affect the consumer's purchase decision?
Explain the components of multi-sided market : Explain the components of multi-sided market for smartphone ecosystem?
Key design considerations of infrastructure : Describe the key design considerations of the infrastructure.
How much is Fethe equity worth : The risk-free rate is 6%, and the standard deviation of returns for companies similar to Fethe is 50%. How much is Fethe equity worth
Universal definition of cyber warfare : Do you think there can be a universal definition of Cyber Warfare?
Potential impact of choice on organizational culture : Organizations from time to time must make hard decisions (expand, lay off employees, or close a facility). As a manager, you will have to use work experiences,
Research risk management plans : Research risk management plans. Create an outline for a basic risk management plan with anticipated section headings.
What is the firm WACC and total corporate value : If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firm WACC and total corporate value under each capital structure

Reviews

Write a Review

Finance Basics Questions & Answers

  Summarize the main points of the article

You can easily retrieve possible articles by doing an online search using the terms "psychology" and "paying bills." Summarize the main points of the article.

  Investing in personal financial planning

Discuss the overall role of investing in personal financial planning.

  Determine if the grant proposal is economically justified

Use the conventional and modifi ed B/C methods to determine if this grant proposal is economically justified over a 10-year study period. The foundation's discount rate is 6% per year.

  Explain what beta represents in terms of asset pricing

If a stock's return and risk are such that this would plot above the security market line, is this stock overpriced or underpriced?

  How does structure influence behavioral changes

How does structure influence behavioral changes and how does the impact of structure on behavior alter your approach to undertaking change?

  Fraud-internal controls and technology

Write a paper of no more than 1,050 words describing the two types of fraud, reasons why fraud occurs, and how internal controls, technology, and auditing can help deter and detect fraud.

  Horizontal transaction template

SoftBrook is a new company started by B. Martin. Record the following transactions which occurred during the first month of business:

  What is the return on portfolio

If the price of Harley-Davidson increases to $50 and the price of Yahoo decreases to $20 per share, what is the return on your portfolio?

  What is the fair price for the bond today

Assume that Microsoft bonds have just left the printer and have a stated coupon of $100 (a coupon rate of 10%) and a yield-to-maturity of 15%. The bonds mature in three years and the next coupon is due in one year. What is the fair price for the b..

  What is the beta for stock a

What is the beta for stock A?What is the normal return for stock A?

  Price the bonds from the above table with annual coupon pay

Price the bonds from the above table with annual coupon payments.

  By how much bradford required return exceed farley return

By how much does Bradford's required return exceed Farley's required return? Round your answer to two decimal places.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd