Suppose the Current Value of a Firm's Assets Is $100

question 23

Multiple Choice

Suppose the current value of a firm's assets is $100 million,and the value of equity in the firm is $40 million.Suppose too that the firm has only one issue of debt outstanding: zero-coupon debt with a maturity of three years,and a face value of $70 million.Finally,suppose that the risk-free rate of interest is 4% (continuously-compounded terms) for all maturities.Assuming that firm value evolves according to a lognormal diffusion (as in Merton,1974) ,what is the volatility of the firm's assets?

• A)10.0%
• B)19.2%
• C)24.2%
• D)35.4%

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Definitions:

American Federation of Labor

A national federation of labor unions in the United States founded in 1886, focused on skilled workers.

Overthrow

The act of removing an established government or leader from power, often through forceful or illegal means.

Decolonization

The process by which colonies become independent from the colonial powers that control them. This often involves the re-establishment of the indigenous governance and cultural systems that were suppressed by colonial rule.