8. Equity as an option Strong Co. Is a manufacturing firm. Strong Co.'s current value of operations, Including debt and equity, Is estimated to be $5 millon. Strong Co. has $2 million face-value zero coupon debt that is due in two years. The risk-free rate is 6%, and the volatility of companies similar to Strong Co. is 50%. Strong Co.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. Besed on your understanding of the Black-Scholes option pricing model (OPM), calkulate 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.) Strong Co. Value (Millions of dollars) Equity value Debt value Debt yield Strong Co.'s management is implementing a risk management strategy to reduce its volatility. Complete the following table, assuming that the goal is to reduce Strong Co.s volatility to 30%. Strong Co. Goal (Millions of dollars) Equity value at 30% volatility Debt value at 30% volatility Debt yield at 30% volatility

Assume that you are on the financial staff of ABC Enterprises, and you have collected the following data: (1) The yield to maturity on the company's outstanding 10% annual coupon bonds is 8%, and its tax rate is 25%. (2) The risk-free rate is 2%, the market risk premium (rM - rRF) is 5.5%, and the firm's beta is 1.20. (3) The firm's capital structure consists of 40% debt and 60% equity. What is ABC's WACC? a . 6.50% b. 7.14% c. 7.56% d. 7.90% e. 8.60%

A firm has equity with market value $100 million and debt with market value at $70 million. The debt pays perpetual expected coupons of $3.5 million annually. The above numbers are prior to a stock buyback being announced. The firm uses some of its cash buyback stock on of $20 million. As a result of the fall in its cash, the expected coupon payment to debt reduce to $3.4 million (expected payments is the probability weighted future coupons, and the probability that in some future states of the world the firm would default has increased due to the the stock buyback). Also the rate of discount Rd for expected coupons paid to debt rises to 5.35%. Assume Modigliani-Miller is true (which also means there are no taxes). What will be the value of Equity after the stock buyback? (Do not include the $20 million that is paid to the Equity holders.)

which option is correct

The risk-free rate is 3% per annum with continuous compounding. The price of stock LUV is $85, and its stock-price volatility is 25% per annum. LUV currently does not pay a dividend. What is the price of a 3-month at-the-money American call on LUV? A.$2.94 B.$3.67 C.$5.06 D.$4.54

Equity as an option Carlson Co. is a manufacturing firm. Carlson Co.’s current value of operations, including debt and equity, is estimated to be $15 million. Carlson Co. has $6 million face-value zero coupon debt that is due in five years. The risk-free rate is 5%, and the volatility of companies similar to Carlson Co. is 50%. Carlson Co.’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.) Carlson Co. Value (Millions of dollars) Equity value_______ 9.88 or 11.53 or 10.98 or 10.43…