Question: What is the value of Ls stock for volatilities between 0.20 and 0.95? What in-centives might the manager of L have if she understands this

What is the value of L’s stock for volatilities between 0.20 and 0.95? What in-centives might the manager of L have if she understands this relationship? What might debt holders do in response?

MINI CASE

David Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies average about 30 percent debt, and Mr. Lyons wonders why they use so much more debt, and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant:

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