Question

Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $38,000 that matures in one year. The current market value of the firm’s assets is $41,400. The standard deviation of the return on the firm’s assets is 42 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. a. Based on the Black-Scholes model, what is the market value of the firm's equity and debt? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. What is the firm's continuously compounded cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1