ILLUSTRATION 17.8: Valuing Equity as an Option
Assumethatwearevaluingtheequityinafirmwhoseassets
arecurrentlyvaluedat$100million;thestandarddeviationin
thisassetvalueis40%.Thefacevalueofdebtis$80million
(itiszerocoupondebtwith 10 yearslefttomaturity).The
10-yearTreasurybondrateis10%.Wecanvalueequityasa
call optionon thefirm,using thefollowinginputs for the
option pricing model:
Based on these inputs, the Black-Scholes option pricing
model provides the following value for the call.