# Question

Brozik Corp. has a zero coupon bond that matures in five years with a face value of $60,000. The current value of the company’s assets is $57,000, and the standard deviation of its return on assets is 50 percent per year. The risk-free rate is 6 percent per year, compounded continuously.

a. What is the value of a risk-free bond with the same face value and maturity as the current bond?

b. What is the value of a put option on the firm’s assets with a strike price equal to the face value of the debt?

c. Using the answers from (a) and (b), what is the value of the firm’s debt? What is the continuously compounded yield on the company’s debt?

d. Assume the company can restructure its assets so that the standard deviation of its return on assets increases to 60 percent per year. What happens to the value of the debt? What is the new continuously compounded yield on the debt? Reconcile your answers in (c) and (d).

e. What happens to bondholders if the company restructures its assets? What hap-pens to shareholders? How does this create an agency problem?

a. What is the value of a risk-free bond with the same face value and maturity as the current bond?

b. What is the value of a put option on the firm’s assets with a strike price equal to the face value of the debt?

c. Using the answers from (a) and (b), what is the value of the firm’s debt? What is the continuously compounded yield on the company’s debt?

d. Assume the company can restructure its assets so that the standard deviation of its return on assets increases to 60 percent per year. What happens to the value of the debt? What is the new continuously compounded yield on the debt? Reconcile your answers in (c) and (d).

e. What happens to bondholders if the company restructures its assets? What hap-pens to shareholders? How does this create an agency problem?

## Answer to relevant Questions

Use the Black–Scholes model for pricing a call, put–call parity, and the previous question to show that the Black–Scholes model for directly pricing a put can be written as follows: P = E × e−Rt × N(−d2) − S × ...You are currently working for Clissold Industries. The company, which went public five years ago, engages in the design, production, and distribution of lighting equipment and specialty products worldwide. Because of recent ...How would the analysis of real options change if a company has competitors?There is a European put option on a stock that expires in two months. The stock price is $73, and the standard deviation of the stock returns is 70 percent. The option has a strike price of $80, and the risk-free interest ...A warrant with six months until expiration entitles its owner to buy 10 shares of the issuing firm ’ s common stock for an exercise price of $31 per share. If the current market price of the stock is $15 per share, will ...Post your question

0