In this problem we examine the effect of changing the
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.
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