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Value of a Company and Individual

Suppose that you are the manager and sole owner of a highly leveraged company. All the debt will mature in 1 year. If at that time the value of the company is greater than the face value of the debt, you will pay off the debt. If he value of the company is less than the face value of the debt, you will declare bankruptcy and the debt holders will own the company.

(a) Express your position as an option on the value of the company.
(b) Express the position of the debt holders in terms of options on the value of the
company.
(c) What can you do to increase the value of your position?

Solution Preview

a) The manager and sole owner of the company have a call option on the value of the company. If the value of the company is more than the debt, the call is in the money and owner exercise the call and gain the difference between the value of the company and debt. On the other hand if the value of ...

Solution Summary

234 words to express a stance on company value options, debt holder position and how to increase one's value as a manager.

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