The current market value of the assets of levered firm ABC, Inc is $100 million. The annual standard deviation of returns on the assets is 30%
The firm's capital structure consists of equity and pure discount debt for which payment of $80 million is due in 5 years. The risk-free rate is 5%. Using the Black-Scholes Option Pricing Model to calculate the value of the firm's debt.
a. $44
b. $55
c. $66
d. $77
(The BSOPM formula and cumulative normal distribution function values must be supplied.)
B
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