Advanced Corporate Finance
Autor: irisbubble • April 29, 2018 • Case Study • 580 Words (3 Pages) • 799 Views
Individual Assignment 4
Question 1: LBO risks, returns, and evaluation. (Numbers in $M)
$400M Senior Secured debt |
$200M Mezz Loan |
$200M Equity |
- Capital Structure in Year 0:
[pic 1]
Asset Liabilities
Total equity investment when deal is completed: $800M-$600M=$200M.
Total leverage: total debt / total asset = $600M/$800M=0.75.
Implied Volatility (by try and error):
Current Firm Value | S0 | $800.00 |
Volatility (per year) | σ | 0.25 |
Years to expiration | T | 5.00 |
Annual risk-free rate | r | 4.00% |
Strike Price | X | $510.51 |
|
|
|
| PV[X] | $419.60 |
| d1 | 1.43 |
| d2 | 0.87 |
|
|
|
Call option value |
| $399.82 |
Put option value |
| $19.43 |
Value of Risky Debt | $400.176 |
Risky Debt Interest Rate | 5.00% |
Cumulative Interest Rate | 27.63% |
- σ = 25%.
Delta for senior debt=1-0.925=0.08
- Interest rate calculation:
Current Firm Value | S0 | $800.00 |
Volatility (per year) | σ | 0.25 |
Years to expiration | T | 5.00 |
Annual risk-free rate | r | 4.00% |
Strike Price | X | $903.44 |
|
|
|
| PV[X] | $742.56 |
| d1 | 0.41 |
| d2 | -0.15 |
|
|
|
Call option value |
| $199.98 |
Put option value |
| $142.54 |
Value of Risky Debt | $600.022 |
Risky Debt Interest Rate | 8.53% |
Cumulative Interest Rate | 50.57% |
Interest rate of total debt = 8.53%
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