Question

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 yield on Wilson Dover's debt? a. 7.05% b. 6.36% c. 6.70% d. 7.42% e. 6.04%

Answer 1

d. 7.42%

Step-by-step explanation:

Face value of its 1-year coupon debt is $200 million

Yield = [(Face Value/Price)1/Maturity] −1.0

Using the formula

= [$200/$186.19]1 − 1.0

= 7.42%

Therefore the yield on Wilson Dover's debt will be 7.42%