Green Goose Automation is a manufacturing firm. Green Goose’s current value of operations, including debt and equity, is estimated to be $500 million. Green Goose has $200 million face-value zero coupon debt that is due in three years. The risk-free rate is 5%, and the volatility of companies similar to Green Goose is 60%. Green Goose’s performance has not been very good as compared to previous years. Because the company has debt, it will repay its loan, but the company has the option of not paying equity holders. The ability to make the decision of whether to pay or not looks very much like an option.
Required:
a) Based on your understanding of the Black-Scholes option pricing model (OPM), calculate the following values.
i. Equity value
ii. Debt value
iii. Debt yield