1. Sisters Amy and Beth jointly own El Paso Corporation. Amy's share is 70%. The value of the corporation is $500,000 and its risk in terms of σ is 0.6. Amy would like to buy Beth out and offers her $150,000 cash or a note for $300,000 payable by El Paso Corporation after 5 years. The riskless rate is 8%. Should Beth take the cash or the note? Value of note is $145,472.61. Take cash

2. Thomas and Gerard bought Galveston Corporation by investing $500,000 each. Thomas was a stockholder, and thus the owner of the company. The corporation agreed to pay Gerard $1.5 million after ten years for his share of the business. However, by mutual agreement, they sold the business after 5 years for $6 million and divided the money according to the option pricing theory. The riskless rate at the time was 4%, and the σ of Galveston Corporation was 0.5. Find the amount of money that went to Thomas and to Gerard. Thomas $4,867,478, Gerard $1,132,522

3. Irving Company has total value $325 million, and it has $100 million (face value) of zero-coupon bonds maturing after 10 years. The σ of Irving is .45 and the risk-free interest rate is 5%. Using Black-Scholes model, estimate the debt/assets ratio for the company. 15.62