The market value of Delaware East’s assets is $100 mn. The firm has on

The market value of Delaware East’s assets is $100 mn. The firm has one issue of pure-discount debt outstanding which promises to pay $60 mn. in 5 years.

If the standard deviation of the firm’s assets is 22% and the risk-free rate is 5%, what are the values of the firm’s equity and debt, based on the Black-Scholes model?
value of equity value of debt
a. $54 mn. $46 mn.
b. $46 mn. $54 mn.
c. $38 mn. $62 mn.
d. $30 mn. $70 mn.
FORMULA: C=VN(d) – XN(d-T), where d=
(Also need Cum. Normal Distr. Fn. table)

ANSWER

F