# Black-Scholes-Merton model

Company ABC currently has net assets worth $140 million and has issued $100 million in debt in the form of a zero-coupon bond that matures in one year. By looking at the equity market, we estimate that the volatility of the asset value is 30%. The risk-free interest rate is at 5%. Please find:

1) Equity value of the company according to Black-Scholes-Merton model?

2) What's the credit spread (yield over risk free rate) of the firm debt?

3) What's the 1-year risk-neutral default probability of the company?

4) If the firm defaults, what would be the recovery value according to Merton's model?

https://brainmass.com/economics/bonds/black-scholes-merton-model-284494

#### Solution Preview

Answer:

Given that,

Net asset value, A=$140 million

Debt value, B=$100 million

Volatility, ...

#### Solution Summary

Black-Scholes-Merton model is applied to this case.

$2.19