finance week 7
Your boss now wants you to help Higgs Bassoon Corporation. Higgs Bassoon Corporation is a custom manufacturer of bassoons and other wind instruments. Its current value of operations, which is also its value of debt plus equity, is estimated to be $200 million. Higgs has zero coupon debt outstanding that matures in 3 years with $110 million face value. The risk-free rate is 5%, and the standard deviation of returns for similar companies is 60%. The owners of Higgs Bassoon view their equity investment as an option and would like to know its value. Start with the attached partial model, and answer the following questions:
- Using the Black-Scholes option pricing model, how much is the equity worth?
- How much is the debt worth today? What is its yield?
- How would the equity value change if the company used risk management techniques to reduce its volatility to 45%? Can you explain this?
- Graph the cost of debt versus the face value of debt for values of the face value from $10 to $160 million.
- Graph the values of debt and equity for volatilities from 0.10 to 0.90 when the face value of the debt is $100 million.
Scoring Rubric -
|Levels of Achievement|
100 %Models were estimated with great accuracy, using Excel and provided relevant outputs in an excel file
85 %Models were estimated with moderate accuracy, using Excel and provided relevant outputs in an excel file
75 %Models were estimated with inaccuracy, using Excel and provided relevant outputs in an excel file
50 %Model estimations are mostly incorrect, or no model was provided
100 %Interpretations are provided with great accuracy by addressing all the required questions, and minimum words requirement is met
85 %Interpretations are provided with moderate accuracy by addressing most of all required questions, and minimum words requirement is met
75 %Interpretations are provided with many errors, and, some of important questions were not answered. Minimum words requirement is not met.
50 %Interpretations are mostly incorrect, or no interpretation was provided.
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