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    Two Methods: Ebt and Quity Aluation

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    kayteemini
    The document discusses two methods for valuing debt and equity using the Merton model. It provides inputs for the Black-Scholes option pricing model such as the value of the firm, risk-free rate, and time to maturity. The outputs, such as the call price and put price, are then used to value equity and risky debt. A sensitivity analysis is also presented showing how changes in the standard deviation of firm assets impact the values of equity and risky debt.

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    Two Methods: Ebt and Quity Aluation

    Uploaded by

    kayteemini
    8 views2 pages
    The document discusses two methods for valuing debt and equity using the Merton model. It provides inputs for the Black-Scholes option pricing model such as the value of the firm, risk-free rate, and time to maturity. The outputs, such as the call price and put price, are then used to value equity and risky debt. A sensitivity analysis is also presented showing how changes in the standard deviation of firm assets impact the values of equity and risky debt.

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    FIN 305

    Original Title

    HW25

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    The document discusses two methods for valuing debt and equity using the Merton model. It provides inputs for the Black-Scholes option pricing model such as the value of the firm, risk-free rate, and time to maturity. The outputs, such as the call price and put price, are then used to value equity and risky debt. A sensitivity analysis is also presented showing how changes in the standard deviation of firm assets impact the values of equity and risky debt.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as xlsx, pdf, or txt
    8 views2 pages

    Two Methods: Ebt and Quity Aluation

    Uploaded by

    kayteemini
    The document discusses two methods for valuing debt and equity using the Merton model. It provides inputs for the Black-Scholes option pricing model such as the value of the firm, risk-free rate, and time to maturity. The outputs, such as the call price and put price, are then used to value equity and risky debt. A sensitivity analysis is also presented showing how changes in the standard deviation of firm assets impact the values of equity and risky debt.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLSX, PDF, TXT or read online from Scribd
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    DEBT AND EQUITY VALUATION

    Inputs Value of Firm (V) Firm Asset Std Dev (s) Risk-free Rate (kRF ) Face Value of Debt (B) Time to Maturity (t) Outputs Black-Scholes Option Pricing d1 d2 N(d1) N(d2) Call Price -d1 -d2 N(-d1) N(-d2) Put Price Merton Model Riskfree Debt Value $340.00 50.0% 5.0% $160.00 2.00

    Two Methods

    Analogous Inputs for a Black-Scholes Call Option on a Stock Stock Price Stock Std Dev Risk-free Rate Exercise Price Time to Maturity

    No. 12 Finance 305, FALL 2012 HW 25 Page 1

    1.561 0.854 0.941 0.803 $203.54 -1.561 -0.854 0.059 0.197 $8.31

    $144.77 Method One: Equity is a Call Method Two (equivalent by Put-Call Parity): Risky Debt is Riskfree Debt minus Put = V - Riskfree Debt + Put = Riskfree Debt - Put =V $203.54 $136.46 $340.00

    Equity Value (E) Risky Debt Value (D) Total Value of Firm (V)

    = Call = V - Call =V

    $203.54 $136.46 $340.00

    DEBT AND EQUITY VALUATION

    Impact of Risk

    Data Table: Sensitivity of Equity Value and Risky Debt Value. Input Values for Firm Asset Standard Deviation (s) Output Formulas: 30.0% 40.0% 50.0% 60.0% 70.0% Equity Value (E) $203.54 $195.99 $198.72 $203.54 $209.87 $217.17 Risky Debt Value (D) $136.46 $144.01 $141.28 $136.46 $130.13 $122.83

    Sensitivity of Equity & Risky Debt Values to Firm Asset Std Dev
    $220
    Equity & Risky Debt ($)

    $180

    Equity Value (E) Risky Debt Value (D)

    No. 12 Finance 305, FALL 2012 HW 25 Page 2

    $140

    $100 20% 40% 60% 80%


    Firm Asset Std Dev (s)

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