Mailin Developers is a real estate development company with a project in the Midwest currently valued at
Question:
Mailin Developers is a real estate development company with a project in the Midwest currently valued at \(\$ 20\) million. The company financed the project by borrowing from Commerce Bank. The loan calls for a principal payment of \(\$ 10\) million at the end of four years (no-coupon interest).
a. Use the B-S OPM to determine the equity value of Mailin Developers' Midwest project. Assume \(R=6 \%\) and the volatility of the project's value is \(\sigma=0.3\).
b. What is the value of the creditors' position?
c. Use the B-S OPM to determine the equity value of Mailin Developers' Midwest project and its debt value if the volatility was \(\sigma=0.5\).
d. Using an option perspective, comment on the relation between stock value and variability.
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