How would the equity value and the yield on the debt change

Assignment Help Finance Basics

Reference no: EM131970712

Question: 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 $8 million. Fethe has $5 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 30%. Fethe's owners view their equity investment as an option and they would like to know the value of their investment.

Using the Black-Scholes option pricing model, how much is Fethe's equity worth? Do not round intermediate calculations. Round your answer to two decimal places.

$ million

How much is the debt worth today? What is its yield? Do not round intermediate calculations. Round your answer for the debt worth to two decimal places. Round your answer for the yield on the debt to one decimal place.

Debt worth today: $ million

Yield on the debt: %

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 5%? Do not round intermediate calculations. Round your answer for the equity worth to two decimal places. Round your answer for the yield on the debt to one decimal place.

New equity worth: $ million

New yield on the debt: %

Reference no: EM131970712

Questions Cloud

Fiscal and administrative requirements of idea : How can the state and local education plan best be developed to reveal the extent to which public, private, and non-profit funding methods meet fiscal

What must lisas annual deposit be : Lisa Simpson wants to have $1,500,000 in 45 years by making equal annual end-of the-year deposits into a tax-deferred account paying 825 percent annually.

Current market price of bonds : What will be the current market price of these bonds if the YTM for similar investments in the market is 6.25%?

What should be the company bonds be priced today : What should be the company's bonds be priced today? Assume annual coupon payment and a face value of $1000.

How would the equity value and the yield on the debt change : 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 5%?

What is the value of restructuring to a firm : Equity Inc. is currently an all-equity financed firm. It has 10,000 shares outstanding that sell for $20 each. The firm has an operating income of $30,000.

What weight should it use for debt when calculating the cost : If the company has a $46.4 million market value of equity, what weight should it use for debt when calculating the cost of capital?

What is the maximum possible dividend payout rate : An all-equity-financed firm plans to grow at an annual rate of at least 12%. Its return on equity is 20%. What is the maximum possible dividend payout rate.

Why did companies choose stock options over restricted stock : Essay on Stock Compensation. Note: you do not need to answer in complete sentences; short phrases are acceptable (both here and on the exam).

User Account

All Pages