In this problem we examine the effect of changing the assumptions in Example 16.1.
a. Compute the yield on debt for asset values of $50, $100, $150, $200, and $500. How does the yield on debt change with the value of assets?
b. Compute the yield on debt for asset volatilities of 10% through 100%, in increments of 5%. For the next three problems, assume that a firm has assets of $100 and 5-yearto maturity zero-coupon debt with a face value of $150. Assume that investment projects have the same volatility as existing assets.

  • CreatedAugust 12, 2015
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