Use the Information Below to Answer the Following Question

question 28

Multiple Choice

Use the information below to answer the following question.
Upside Down has a zero coupon bond issue outstanding with a $10,000 face value that matures in one year. The current market value of the firm's assets is $12,400 while the standard deviation of the returns on those assets is 22 percent annually. The annual risk-free rate is 4.6 percent, compounded continuously. What is the market value of the firm's debt based on the Black-Scholes model?

• A) $8,415
• B) $8,900
• C) $9,413
• D) $8,962
• E) $9,311

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Definitions:

Common Stock

Common stock represents ownership interests in a corporation, giving shareholders voting rights and a share in the company’s profits through dividends.

Common Stock

A form of corporate equity ownership, a type of security that represents ownership in a corporation and a claim on part of its profits.

Journal Entry

A recording in the accounting ledger that notes all the financial transactions of a business.

Prepaid Insurance

An asset account that reflects the amount paid for insurance policies in advance, before the coverage period begins.