The current market value of the assets of Kleiner, Inc. is $72 million, with a standard deviation of 20 percent per year. The firm has zero-coupon bonds outstanding with a total face value of $35 million. These bonds mature in 3 years. The risk-free rate is 5 percent per year compounded continuously. What is the value of d₁?

Question

Quizplus · Accepted Answer

The value of d1 is calculated using the Black-Scholes formula for option pricing. The formula for d1 is:  d1 = [ln(V/F) + (r + (σ^2)/2) * T] / (σ * sqrt(T))  where V = current market value of assets = $72 million, F = face value of debt = $35 million, r = risk-free rate = 5%, σ = standard deviation = 20%, and T = time to maturity = 3 years.  Plugging in these values:  d1 = [ln(72/35) + (0.05 + (0.2^2)/2) * 3] / (0.2 * sqrt(3))  d1 ≈ 2.69

The Current Market Value of the Assets of Kleiner, Inc