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You are considering investing in a firm that is in financial distress. While the assets are...

You are considering investing in a firm that is in financial distress. While the assets are valued at $50 million, the face value of its debt is $92 million (i.e.: it owes more than the value of its assets). Regular valuation techniques would indicate that the value of equity for this firm is zero (as it can't be negative). However, you want to apply Real Option Valuation to see if it's worth investing. The standard deviation of the firm asset's value is 60%, the risk-free rate is 4.5%. The debt is zero-coupon bonds, which matures in 3 years. In addition, an analysts in your team has already computed the option pricing Normal Distribution probabilities, so you know that N(d1)=0.525, and N(d2)=0.164. What is the value of equity for this firm?

In excel

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

N(d1) AND N(d2) VALUES ARE TAKEN AS 0.525 AND 0.164, GIVEN BY YOU

IF WE TAKE ACTUAL VALUES OF BOTH TILL 4 DECIMALS, ANSWER MAY DIFFER.

ANSWER IS IN MILLIONS ONLY, ROUNDED TO 2 DECIMALS

jeff jeffy answered 1 year ago
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