Your boss now wants you to help Higgs Bassoon Corporation. Higgs Bassoon Corporation is a custom manufacturer of bassoons and other wind instruments. Its current value of operations, which is also its value of debt plus equity, is estimated to be $200 million. Higgs has zero coupon debt outstanding that matures in 3 years with $110 million face value. The risk-free rate is 5%, and the standard deviation of returns for similar companies is 60%. The owners of Higgs Bassoon view their equity investment as an option and would like to know its value. Start with the attached partial model, and answer the following questions:
Using the Black-Scholes option pricing model, how much is the equity worth?
How much is the debt worth today? What is its yield?
How would the equity value change if the company used risk management techniques to reduce its volatility to 45%? Can you explain this?
Graph the cost of debt versus the face value of debt for values of the face value from $10 to $160 million.
Graph the values of debt and equity for volatilities from 0.10 to 0.90 when the face value of the debt is $100 million.
Scoring Rubric –
Levels of Achievement
Criteria
Exemplary
Accomplished
Developing
Beginning
Excel File
Weight 50.00%
100 %
Models were estimated with great accuracy, using Excel and provided relevant outputs in an excel file
85 %
Models were estimated with moderate accuracy, using Excel and provided relevant outputs in an excel file
75 %
Models were estimated with inaccuracy, using Excel and provided relevant outputs in an excel file
50 %
Model estimations are mostly incorrect, or no model was provided
Interpretation
Weight 50.00%
100 %
Interpretations are provided with great accuracy by addressing all the required questions, and minimum words requirement is met
85 %
Interpretations are provided with moderate accuracy by addressing most of all required questions, and minimum words requirement is met
75 %
Interpretations are provided with many errors, and, some of important questions were not answered. Minimum words requirement is not met.
50 %
Interpretations are mostly incorrect, or no interpretation was provided.
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