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3. a. A company's assets are valued at $800m. It has $1bn face value debt trading at a 40% discount and maturing in 4 years. The standard deviation of asset values is 50%, the risk-free rate is 3%, and the company is not expected to pay any dividends for the next four years. i. Estimate the probability of default of the company. (5 marks) ii. Estimate the value of equity of the company as a liquidation option. (5 marks) Formula Sheet 1-1+9) Two-stage DDM Equity 1+ Div. (1+9H) K.-9. Div 1 (k-9N)*(1+k Two-stage RIM Equity, = BV, + RI+ RU + (1+KOH (ken -9N)*(1+keH Intrinsic P/E ratio P. E = Payout ratio* (1+g) K-9 (1-g/RoE)*(1+g) K -9 Intrinsic EV/EBITDA ratio EBITDA Dep*T (1-1)+EBITDA Capex ANWC](1+g) EBITDA EBITDA K-9 Intrinsic P/B ratio P BV. ROE Payout ratio RoE-9 ko-g ko-g Call value = Se" "N(d1) - Xe"N(d2) Put value = Xe 'N(-d2) - SN(-da) Where dIn(S/X)+(r-q+0.5*o IT AVT ) d. In(S/X)+(-9-0.5. CAVT Probability of bankruptcy = N(-d2) Formula Sheet 1-(1+94 ) Equity, Div. (1+9H) KEH-9H 1 + Two-stage DDM K Divut + (ken -9N) *(1+keH Two-stage RIM Equity, = BV, + RIL_+ RUL **(1+ke) (kN-9)*(1+ke)" Intrinsic P/E ratio P. E = Payout ratio. (1+g) (1-g/RoE) (1+9) K-9 K-9 Intrinsic EV/EBITDA ratio EVIGT Dep T Capex ANWC (1+g) EBITDA EBITDA EBITDA K-9 Intrinsic P/B ratio P. BV. RoE* Payout ratio kong RoE-9 ko-g Call value = Se"TN(d1) - Xe"N(d2) Put value = Xe TN(-da) - SN(-d4) Where d In(S/X)+(r-q+0.5* IT OAT IT d. In(S/X)+(r-9-0.5 CAT Probability of bankruptcy = N(-d2)

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