Scott Corp. is a manufacturing firm. Scott Corp.s current value of operations, including debt and equity, is estimated to be $35 million. Scott Corp. has $14 million face-value zero coupon debt that is due in two years. The risk-free rate is 5%, and the volatility of companies similar to Scott Corp. is 60%. Scott Corp.s performance has not been very good as compared to previous years. Because the company has debt, it will repay its loan, but the company has the option of not paying equity holders. The ability to make the decision of whether to pay or not looks very much like an option. Based on your understanding of the Black-Scholes option pricing model (OPM), calculate the following values and complete the table. (Note: Use 2.7183 as the approximate value of e in your calculations. Also, do not round intermediate calculations. Round your answers to two decimal places.) Multiple choice.

Scott Corp. is a manufacturing firm. Scott Corp.s current value of operations, including debt and equity, is estimated to be $35 million. Scott Corp. has $14 million face-value zero coupon debt that is due in two years. The risk-free rate is 5%, and the volatility of companies similar to Scott Corp. is 60%. Scott Corp.s performance has not been very good as compared to previous years. Because the company has debt, it will repay its loan, but the company has the option of not paying equity holders. The ability to make the decision of whether to pay or not looks very much like an option.

If its risk management strategy is successful and Scott Corp. can reduce its volatility, the value of Scott Corp.s stock will a. increase or b. decrease? and the value of its debt will a. increase or b. decrease?

k Lyuily vaiue al uv vuialilly Scott Corp. Goal (Millions of dollars) Equity value at 30% volatility Debt value at 30% volatility Debt yield at 30% volatility value of its debt will C to reduce Scott Corp.'s volatility to \begin{tabular}{l|l} Scott Corp. Goal (Millions of d & 5.33% \\ \hline Equity value at 30% volatility & \\ \hline Debt value at 30% volatility & 5.44% \\ Debt yield at 30% volatility & \\ \cline { 3 - 3 } \end{tabular}