Suppose Backwoods Chemical Limited is financed partly by a zero-coupon bond that has a two-year maturity....

  

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Suppose Backwoods Chemical Limited is financed partly by a zero-coupon bond that has a two-year maturity. The market value of the company's total assets is $1,290, and the annual standard deviation of its assets value (o) is 43%. The risk-free interest rate is 5%. The company's book-value balance sheet is: Backwoods Chemical Company (Book Values) $ 490 $ 1,090 $ 1,690 $ 1,090 $ 2,180 $ 2,180 Net working capital Net fixed assets Total assets Debt Equity (net worth) Total value QUESTIONS 1. Consider the shareholder's investment in the equity of Backwoods as a financial option. What type of option (call or put) is this option? What is shareholder's position (long or short) in this option? [2 marks] 2. What is the underlying asset for the shareholders' equity as an option? What is the option's exercise price? Is the option currently in-the-money or out-of-the-money? [4 marks] 3. Calculate the value of Backwoods' shareholder equity as a call option. (Round your answer to the nearest dollar amount) [6 marks] 4. What is the market value of Backwoods' debt? (Round your answer to the nearest dollar amount) [2 marks] Suppose Backwoods Chemical Limited is financed partly by a zero-coupon bond that has a two-year maturity. The market value of the company's total assets is $1,290, and the annual standard deviation of its assets value (o) is 43%. The risk-free interest rate is 5%. The company's book-value balance sheet is: Backwoods Chemical Company (Book Values) $ 490 $ 1,090 $ 1,690 $ 1,090 $ 2,180 $ 2,180 Net working capital Net fixed assets Total assets Debt Equity (net worth) Total value QUESTIONS 1. Consider the shareholder's investment in the equity of Backwoods as a financial option. What type of option (call or put) is this option? What is shareholder's position (long or short) in this option? [2 marks] 2. What is the underlying asset for the shareholders' equity as an option? What is the option's exercise price? Is the option currently in-the-money or out-of-the-money? [4 marks] 3. Calculate the value of Backwoods' shareholder equity as a call option. (Round your answer to the nearest dollar amount) [6 marks] 4. What is the market value of Backwoods' debt? (Round your answer to the nearest dollar amount) [2 marks]

Answer rating: 100% (QA)

1 The shareholders investment in the equity of Backwoods can be considered as a call option The shar... View the full answer