roblem 2. Option theory and financial structure Repres is a holding, its assets consists exclusively of1 million shares of Arpo company, with a value per share of 150 euros. In liabilities Repres has zero-coupon bonds with a face value of 140 million euros and 1 million shares. We consider equity as a call option on company's assets. 4-year maturity options on the shares of the Arpo company are traded on the market. Prices of the options with corresponding exercise prices are as follows Exercise price 120 140 180 Value of call options 62 52 36 1) a) Compute the value of equity and the value of debt of the company Repres Corporate Finance 2019 b) Compute the implicit rate of return on debt. Risk-free rate is 5%. c) What is the value of the put option sold by debtholders to shareholders d) Suggest a value decomposition of company's assets on call and put option 2) The company considers two financial decisions. It will make the decision in favour of the old shareholders. In the first case, the company decides to increase debt by 40 mln of additional debt, which will be used to pay exceptional dividends to the shareholders a) What is the new value of equity and debt of Repres company? b) What is the implicit discount rate of the debt? c) What are the gains and losses for shareholders, debtholders and new debtholders? 3) As a second solution the company may renegotiate its debt, its maturity will increase to 5 years. The value of call option with 5-year maturity is 58 euros a) What is the new value of equity and debt of Repres company? b) What is the implicit discount rate of the debt? c) What are the gains and losses for shareholders and debtholders? 4) Conclude: which decision is the best to the shareholders? roblem 2. Option theory and financial structure Repres is a holding, its assets consists exclusively of1 million shares of Arpo company, with a value per share of 150 euros. In liabilities Repres has zero-coupon bonds with a face value of 140 million euros and 1 million shares. We consider equity as a call option on company's assets. 4-year maturity options on the shares of the Arpo company are traded on the market. Prices of the options with corresponding exercise prices are as follows Exercise price 120 140 180 Value of call options 62 52 36 1) a) Compute the value of equity and the value of debt of the company Repres Corporate Finance 2019 b) Compute the implicit rate of return on debt. Risk-free rate is 5%. c) What is the value of the put option sold by debtholders to shareholders d) Suggest a value decomposition of company's assets on call and put option 2) The company considers two financial decisions. It will make the decision in favour of the old shareholders. In the first case, the company decides to increase debt by 40 mln of additional debt, which will be used to pay exceptional dividends to the shareholders a) What is the new value of equity and debt of Repres company? b) What is the implicit discount rate of the debt? c) What are the gains and losses for shareholders, debtholders and new debtholders? 3) As a second solution the company may renegotiate its debt, its maturity will increase to 5 years. The value of call option with 5-year maturity is 58 euros a) What is the new value of equity and debt of Repres company? b) What is the implicit discount rate of the debt? c) What are the gains and losses for shareholders and debtholders? 4) Conclude: which decision is the best to the shareholders