Question: (a) Using the BlackScholes Option~pricing model, calculate: (i) the value of the equity and debt of the company and the value of the risk free

(a) Using the BlackScholes Option~pricing model, calculate: (i) the value of the equity and debt of the company and the value of the risk free debt with the same redemption value and maturity as the company's debt; (10 marks) (ii) the value of limited liability for SansaStark PLC and clearly explain the benefits of the limited liability for shareholders and, more generally, for the economy. (15 marks) (b) Now suppose that SansaStark PLC undertakes the actions outlined below in points (i) and (ii). In each case, recalculate the value of limited liability and explain why the new values are different (or not) compared to the value of limited liability in the baseline scenario outlined in (a). Also explain why shareholders and debtholders are better off (or not) in each case. (i) The company pays special dividends financed by liquidating assets for a total value of 50 million. (10 marks) (ii)The company pays dividends financed by issuing new debt worthy 50 million. (10 marks)

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