Question

Wilson Dover Inc. The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050. Refer to the data for Wilson Dover Inc. What is the value (in millions) of Wilson Dover's debt if its equity is viewed as an option?

a. $167.57
b. $186.19
c. $204.81
d. $225.29
e. $247.82

Answer 1

b. $186.19

Step-by-step explanation:

Value of Nd1 = 0.9720

Value of Nd2 = 0.9050

Risk free rate = 5%

Value of the option = $500 million

Value of the coupon debt = $200 million

Value of option = [P*Nd1 - X*e^(risk free rate*time) * ND2]

Value of option = [500*0.9720 - 200*e^(-0.05) * 0.9050]

Value of option = [486-190.24 * 0.9050]

Value of option = $313.82 million

Value of Wilson Dover's debt = $500 million - $313.82 million

Value of Wilson Dover's debt = $186.18 million