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27 May, 00:20

The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N (d1) = 0.9720 and N (d2) = 0.9050. Refer to the data for Wilson Dover Inc. What is the yield on Wilson Dover's debt? a. 7.05% b. 6.36% c. 6.70% d. 7.42% e. 6.04%

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  1. 27 May, 00:33
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    d. 7.42%

    Explanation:

    Face value of its 1-year coupon debt is $200 million

    Yield = [ (Face Value/Price) 1/Maturity] - 1.0

    Using the formula

    = [$200/$186.19]1 - 1.0

    = 7.42%

    Therefore the yield on Wilson Dover's debt will be 7.42%
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