21-11 a. The inputs to the Black and Scholes option pricing model are P = 5, X = 2, rRF = 6%, = 50%, and t = 2 years. Given these inputs, the value of a call option is calculated as: = . = . Using Normsdist function N(d1) = 0.9656, and N(d2) = 0.8669. This gives a Excel’s value of the call option equal to: = million b. The debt must therefore be worth 5-3.29 = $1.71 million. Its yield is . c. At a volatility of 30% d1 = 2.6547 and N(d1) = 0.9960. d2 = 2.2304 and N(d2) = 0.9871. This gives an option value of $3.23 million. The debt value is then 5.0 – 3.23 = $1.77 million. Its yield is 6.3%. The value of the stock goes down and the value of the debt goes up because with lower risk, Fethe has less of a chance of a “home run.”
21-11 a. The inputs to the Black and Scholes option pricing model are P = 5, X = 2, rRF = 6%, = 50%, and t = 2 years. Given these inputs, the value of a call option is calculated as: = . = . Using Excel’s Normsdist function N(d1) = 0.9656, and N(d2) = 0.8669. This gives a value of the call option equal to: = million b. The debt must therefore be worth 5-3.29 = $1.71 million. Its yield is . c. At a volatility of 30% d1 = 2.6547 and N(d1) = 0.9960. d2 = 2.2304 and N(d2) = 0.9871. This gives an option value of $3.23 million. The debt value is then 5.0 – 3.23 = $1.77 million. Its yield is 6.3%. The value of the stock goes down and the value of the debt goes up because with lower risk, Fethe has less of a chance of a “home run.”
FM14e_SM_Ch21.docx