Digital Organics has 11.1 million outstanding shares trading at $36 per share. I
ID: 2758105 • Letter: D
Question
Digital Organics has 11.1 million outstanding shares trading at $36 per share. It also has a large amount of debt outstanding, all coming due in one year. The debt pays interest at 9%. It has a par (face) value of $339 million, but is trading at a market value of only $291 million. The one-year risk-free interest rate is 7%.
a. Complete the put–call parity formula for Digital Organics’ stock, debt, and assets. (Enter your answers in millions. Round your answers to 1 decimal place.) Value of call + = Value of put + + PV(Debt, at risk-free rate) = + Assets $ + $ = $ + $
b. What is the value of the company’s option to default on its debt? (Enter your answer in millions.) Value of default put $
Explanation / Answer
Equity = 11.Mn *36 =399.6 Mn
Debt at risk free rate =339/1.07 =316.88
Assets = Market value of Debt + Equity
=399.6+291 =690.6
Now value of default option =399.6 +316.88 =716.48
value fo default option = 716.8 - 690.6
=25.88
Vaue of default option = 316.88 -291
= 25.88
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