The assets of Uptown Stores are currently worth $138,000.These assets are expected to be worth either $120,000 or $150,000 one year from now.The company has a pure discount bond outstanding with a $130,000 face value and a maturity date of one year.The risk-free rate is 4.3 percent.What is the value of the equity in this firm?

Question

Quizplus · Accepted Answer

Number of options needed = ($150,000 - $120,000)/($20,000 - $0) = 1.5$138,000 = 1.5C₀ + ($120,000/(1 + 0.043); C₀ = $15,298

The Assets of Uptown Stores Are Currently Worth $138,000