Essay About 400.176Risky Debt Interest Rate5.00 And Total Debt

Advanced Corporate Finance
Individual Assignment 4Question 1: LBO risks, returns, and evaluation. (Numbers in $M)$400M Senior Secured debt$200M  Mezz Loan$200M EquityCapital Structure in Year 0:[pic 1]                      Asset                                LiabilitiesTotal 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 ValueS0$800.00Volatility (per year)σ0.25Years to expirationT5.00Annual risk-free rater4.00%Strike PriceX$510.51    PV[X]$419.60 d11.43 d20.87   Call option value $399.82Put option value $19.43Value of Risky Debt$400.176Risky Debt Interest Rate5.00%Cumulative Interest Rate27.63%σ = 25%.Delta for senior debt=1-0.925=0.08Interest rate calculation:Current Firm ValueS0$800.00Volatility (per year)σ0.25Years to expirationT5.00Annual risk-free rater4.00%Strike PriceX$903.44    PV[X]$742.56 d10.41 d2-0.15   Call option value $199.98Put option value $142.54Value of Risky Debt$600.022Risky Debt Interest Rate8.53%Cumulative Interest Rate50.57%Interest rate of total debt = 8.53%