# You are given the following information about a European call option on stock ABC: S = $40;

## Question:

You are given the following information about a European call option on stock ABC:

S = $40;

X = $37;

R = 4.5% per year, continuously compounded;

sigma = 53%; and

T = 2 years.

What is d1 when you use the Black-Scholes formula to price the option?

What is the call option value when you use the Black-Scholes formula to price the option ?

Suppose a firm has a single zero-coupon bond issue outstanding with face value of $90,000 due in a year. The current market value of the firm’s asset is $100,000, and the risk-free rate is 10%. The firm is taking on a risky project, which will either increase the firm value in a year to $120,000 or decrease to $80,000. What is the value of equity ?

What is the yield on the debt?

A firm has a single zero-coupon bond issue outstanding with a face value of $10 million. It matures in seven years. The current market value of the firm’s assets is $13 million. The volatility of the return on the firm’s assets is 50% per year. The risk-free rate is 6%, continuously compounded. What is the debt value ?

What is the continuously compounded cost of debt ?

**Related Book For**

## Income Tax Fundamentals 2013

ISBN: 9781285586618

31st Edition

Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill