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%
Correct Answer:
Verified
Correct Answer:
Verified
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