Suppose the Current Value of a Firm's Assets Is $100

Multiple Choice

Suppose the current value of a firm's assets is $100 million,and the value of equity in the firm is $40 million.Suppose too that the firm has only one issue of debt outstanding: zero-coupon debt with a maturity of three years,and a face value of $70 million.Finally,suppose that the risk-free rate of interest is 4% (continuously-compounded terms) for all maturities.Assuming that firm value evolves according to a lognormal diffusion (as in Merton,1974) ,what is the volatility of the firm's assets?

A) 10.0%
B) 19.2%
C) 24.2%
D) 35.4%