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

question 2

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%

---

Definitions:

Indian Tribes

Indigenous peoples in the United States with distinct cultures, languages, and territories, recognized as sovereign entities with their own governments and rights.

Mound Builders

Prehistoric indigenous peoples of North America who constructed various types of earthworks, including large mounds used for ceremonial, burial, and residential purposes.

American Southwest

A region in the United States known for its unique cultural heritage, blending Native American, Mexican, and American influences, often characterized by its desert landscape.

Christian Liberty

The concept in Christian theology that believers are freed from the penalties of sin by faith in Jesus Christ, leading to a moral life guided by the Spirit.