Please answer both question 19

Please answer both question

19. Equity as an Option and Net Present Value – Sunburn Sunscreen has a zero-coupon bond issue outstanding with a $15,000 face value that matures in one year. The current market value of the firm’s assets is $15,800. The standard deviation of the return on the firm’s assets is 38 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously.

Suppose the firm is considering two mutually exclusive investments. Project A has an NPV of $1,200, and project B has an NPV of $1,600. As a result of taking project A, the standard deviation of the return on the firm’s assets will increase to 55 percent per year. If project B is taken, the standard deviation will fall to 34 percent per year.

What is the value of the firm’s equity if projects A is undertaken? Use the Black–Scholes model.

Answer:

20. Equity as an Option and Net Present Value Sunburn Sunscreen has a zero-coupon bond issue outstanding with a $15,000 face value that matures in one year. The current market value of the firm’s assets is $15,800. The standard deviation of the return on the firm’s assets is 38 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously.

Suppose the firm is considering two mutually exclusive investments. Project A has an NPV of $1,200, and project B has an NPV of $1,600. As a result of taking project A, the standard deviation of the return on the firm’s assets will increase to 55 percent per year. If project B is taken, the standard deviation will fall to 34 percent per year.

What is the value of the firm’s equity if projects B is undertaken? Use the Black–Scholes model.

Answer

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