Katie D's has total assets valued at $1,950.These assets are expected to increase in value to either $1,800 or $2,400 by next year.One year from now,the company must repay a $2,000 pure discount bond.The risk-free rate is 6 percent.What is the current value of the firm's debt?

Question

Quizplus · Accepted Answer

Number of options needed = ($2,400 - 1,800)/($400 - 0)= 1.5$1,950 = 1.5C₀ + $1,800/1.06C₀ = $167.92Value of debt = $1,950 - 167.92 = $1,782.08

Katie D's Has Total Assets Valued at $1,950