You Would Like to Know the Beta of Debt for KT

question 27

Multiple Choice

You would like to know the beta of debt for KT Industries.The value of KT's outstanding equity is $50 million,and you have estimated its beta to be 1.62.You cannot,however,find enough market data to estimate the beta of its debt,so you decide to use the Black-Scholes formula to find an approximate value for the debt.KT has a five year zero coupon bond outstanding with a market value of $80 million.If the estimated $\Delta$ from the Black-Scholes model is .60,then the beta for KT's debt is closest to:

• A) 1.00
• B) 0.59
• C) 0.90
• D) 2.70

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Definitions:

Expansionary Gap

A situation in an economy where actual gross domestic product exceeds the potential GDP, leading to inflationary pressures.

Natural Rate

The level of economic output at which the rate of inflation is stable, often related to the concept of the natural rate of unemployment where the labor market is in equilibrium.

Consumer Price Index

A metric that analyzes the weighted average cost of a selection of consumer goods and services, such as medical care, transportation, and food, to measure inflation.

Short-Run Aggregate Supply

Represents the total supply of goods and services that firms in an economy plan on selling during a short-term period, given the level of prices.