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 options pricing. Here, d1 = [ln(V/F) + (r + (σ^2)/2)T] / (σ√T), where V is the current value of the assets, F is the face value of the debt, r is the risk-free rate, σ is the standard deviation, and T is the time to maturity. Plugging in the values: d1 = [ln(72/35) + (0.05 + (0.2^2)/2) * 3] / (0.2√3) = 2.69.

The Current Market Value of the Assets of Kleiner, Inc