You are thinking about buying the debt in a private firm that has very similar risk and capital structure as SleazCo. SleazeCo has zero-coupon debt that requires them to pay back $160,000,000 three years from now. Given this loan, the market value of SleazCo’s equity is $25,000,000 and has a volatility of 80% per year. The annual risk-free rate is .02 at all maturities. SleazeCo has no other debt. What are the estimates of the following values for SleazCo based on the Merton Model? Volatility of Assets () = _______________ Value of Assets (V0) = _________________ Market Value of the Debt now = _________________ Value of Debt if it is risk free = _________________ Expected Loss from default = __________________ Probability of default on the debt = _______________ Expected recovery rate on the debt = ______________
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
You are thinking about buying the debt in a private firm that has very similar risk and capital structure as SleazCo. SleazeCo has zero-coupon debt that requires them to pay back $160,000,000 three years from now. Given this loan, the market value of SleazCo’s equity is $25,000,000 and has a volatility of 80% per year. The annual risk-free rate is .02 at all maturities. SleazeCo has no other debt. What are the estimates of the following values for SleazCo based on the Merton Model?
Volatility of Assets () = _______________
Value of Assets (V0) = _________________
Market Value of the Debt now = _________________
Value of Debt if it is risk free = _________________
Expected Loss from default = __________________
Probability of default on the debt = _______________
Expected recovery rate on the debt = ______________
Step by step
Solved in 2 steps
