# Question

Digital Organics has 10 million outstanding shares trading at $25 per share. It also has a large amount of debt outstanding, all coming due in one year. The debt pays interest at 8%. It has a par (face) value of $350 million, but is trading at a market value of only $280 million. The one-year risk-free interest rate is 6%.

a. Write out the put–call parity formula for Digital Organics’ stock, debt, and assets.

b. What is the value of the company’s option to default on its debt?

a. Write out the put–call parity formula for Digital Organics’ stock, debt, and assets.

b. What is the value of the company’s option to default on its debt?

## Answer to relevant Questions

The stock price of Heavy Metal (HM) changes only once a month: either it goes up by 20% or it falls by 16.7%. Its price now is $40. The interest rate is 12.7% per year, or about 1% per month.a. What is the value of a ...Use the Black–Scholes formula to value the following options:a. A call option written on a stock selling for $60 per share with a $60 exercise price. The stock’s standard deviation is 6% per month. The option matures in ...Look again at the valuation in Table of the option to invest in the Mark II project. Consider a change in each of the following inputs. Would the change increase or decrease the value of the expansion option?a. Increased ...Describe each of the following situations in the language of options:a. Drilling rights to undeveloped heavy crude oil in Northern Alberta. Development and production of the oil is a negative-NPV endeavor. (The break-even ...Which of the following statements always apply to corporations?a. Unlimited liability.b. Limited life.c. Ownership can be transferred without affecting operations.d. Managers can be fired with no effect on ownership.Post your question

0