Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $33,000 that matures in one year. The current market value of the firm’s assets is $36,400. The standard deviation of the return on the firm’s assets is 43 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously.
a. Based on the Black–Scholes model, what is the market value of the firm’s equity and debt? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Market value
Equity $
Debt $
b. What is the firm’s continuously compounded cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Cost of debt %