Use the following information to answer the question(s) below.
Galt Industries is trading for $20 per share and has 25 million shares outstanding. Galt Industries has a debt-equity ratio of 0.4 and its debt is zero coupon debt with a ten year maturity and a yield to maturity of 8%.
-In describing Galt's equity as a call option,the market value of the assets underlying the call option are:

Question

Quizplus · Accepted Answer

D) MV of equity = $20 share x 25 million shares = $500 million.
Since the D/E ratio = .4 => Debt/$500 = .4 => Debt = .4(500) = $200 million in debt.
Therefore total value (assets) = $500 equity + $200 debt = $700 million.

Use the Following Information to Answer the Question(s) Below