Higgs Bassoon Corporation Assignment
Higgs Bassoon Corporation is a custom manufacturer of bassoons and other wind instruments. Its current value of operations, which is also its value of debt plus equity, is estimated to be $200 million. Higgs has a $110 million face value, zero-coupon debt that is due in 3 years. The risk-free rate is 5%, and the standard deviation of returns for similar companies is 60%. The owners of Higgs Bassoon view their equity investment as an option and would like to know the value of their investment. 10 a.
Using the Black-Scholes Option Pricing Model, how much is the equity worth? 11 12 Black-Scholes Option Pricing Model 13 Total Value of Firm 200000000.00 this is the current value of operations 14 Face Value of Debt 110000000.00 15 Risk-Free rate 5% 16 Maturity of debt (years) 3.00 17 Standard Dev. 60.00 this is sigma–also known as volatility 18 d use the formula from the text 19 d2 use the formula from the text 20 N(d) use the Normsdist function in the function wizard 21 N(d) 22 Call Price = Equity Value million 23 24 b. How much is the debt worth today?What is its yield? 25 million 26 Debt value = Total Value – Equity Value = 27 Debt yield = 28 н I F G 28 29 c. How much would the equity value and the yield on the debt change if Fethe's 30 management were able to use risk management techniques to reduce its volatility to 31 45 percent? Can you explain this? 32 33 Equity value at 60% volatility million 34 Equity value at 45% volatility million 35 Percent change million 36. Get Accounting homework help today
