PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 23, Problem 8PS
Default option Digital Organics has 10 million outstanding shares trading at $25 per share. It also has a large amount of debt outstanding, all coming due in one year. The debt pays interest at 8%. It has a face value of $350 million but is trading at a market value of only $280 million. The one-year risk-free interest rate is 6%.
- a. Write out the put–call parity formula for Digital Organics’s stock, debt, and assets.
- b. What is the value of the company’s option to default on its debt?
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Students have asked these similar questions
J-Rata Corp shares are currently trading at $30 each. It is expected to increase by 10% or decrease by 6% during the next two-three months. If its strike price at maturity in six months is set as $32 and the risk free rate is 8% per annum for all maturities:
(a) Calculate its call options price and its put option price currently
(b)Test and prove that the put-call parity is holding based on your option pricing.
The common stock of Triangular File Company is selling at $91. A 13-week call option written on Triangular File's stock is selling for $9.
The call's exercise price is $101. The risk-free interest rate is 8% per year.
a. Suppose that puts on Triangular stock are not traded, but you want to buy one. Which combination will produce the same results?
Buy call, invest PV(EX), sell stock short
Sell call, invest PV(EX), sell stock short
Buy call, lend PV(EX), buy stock
Sell call, lend PV(EX), buy stock
b. Suppose that puts are traded. What should a 13-week put with an exercise price of $101 sell for? (Do not round intermediate
calculations. Round your answer to 2 decimal places.)
Put option price
A firm's bonds have a maturity of 12 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 6
years at $1,209.43, and currently sell at a price of $1,365.89. What are their nominal yield to maturity and their nominal
yield to call? Do not round intermediate calculations. Round your answers to two decimal places. YTM: % YTC: % What
return should investors expect to earn on these bonds? I. Investors would expect the bonds to be called and to earn the
YTC because the YTC is less than the YTM. II. Investors would expect the bonds to be called and to earn the YTC
because the YTC is greater than the YTM. III. Investors would not expect the bonds to be called and to earn the YTM
because the YTM is greater than the YTC. IV. Investors would not expect the bonds to be called and to earn the YTM
because the YTM is less than the YTC.
Chapter 23 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 23 - Expected yield You own a 5% bond maturing in two...Ch. 23 - Bond ratings In February 2018, Aaa bonds yielded...Ch. 23 - Bond ratings It is 2030 and the yields on...Ch. 23 - Prob. 4PSCh. 23 - Default option Other things equal, would you...Ch. 23 - Prob. 6PSCh. 23 - Prob. 7PSCh. 23 - Default option Digital Organics has 10 million...Ch. 23 - Prob. 9PSCh. 23 - Prob. 10PS
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