Frostbite Thermal Wear has a zero coupon bond issue outstanding with a face value of $20,000 that matures in one year. The current market value of the firm's assets is $23,000. The standard deviation of the return on the firm's assets is 52 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. What is the market value of the firm's equity based on the Black-Scholes model? (Round your answer to the nearest $100.)

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Quizplus · Accepted Answer

d₁ = [ln ($23,000/$20,000) + (0.06 + 0.52²/2) F1F1F1S1F1F1F10 1]/[0.52 F1F1F1S1F1F1F10 (1^1/2)] = 0.6442d₂ = 0.6442 - [0.52 F1F1F1S1F1F1F10 (1^1/2)] = 0.1242N(d₁) = 0.7403N(d₂) = 0.5494Equity = $23,000(0.7403) - ($20,000e^-0.06(1)) (0.5494) = $6,677.86 F1F1F1S1F1F1F10 $6,700

Frostbite Thermal Wear Has a Zero Coupon Bond Issue Outstanding