Sunburn Sunscreen has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm's assets is $10,600. The standard deviation of the return on the firm's assets is 40 percent per year, and the annual risk-free rate is 7 percent per year, compounded continuously. What is the market value of the firm's debt based on the Black-Scholes model? (Round your answer to the nearest $100.)

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d₁ = [ln ($10,600/$10,000) + (0.07 + 0.4²/2) F1F1F1S1F1F1F10 1]/[0.4 F1F1F1S1F1F1F10 (1^1/2)] = 0.5207d₂ = 0.5207 - [0.4 F1F1F1S1F1F1F10 (1^1/2)] = 0.1207N(d₁) = 0.6987N(d₂) = 0.5480Equity = $10,600(0.6987) - ($10,000e^-0.07(1)) (0.548) = $2,296.50Debt = $10,600 - $2,296.50 = $8,303.50 F1F1F1S1F1F1F10 $8,300

Sunburn Sunscreen Has a Zero Coupon Bond Issue Outstanding with a $10,000