As of September? 2012, Google? (GOOG) had no debt. Suppose the? firm's managers are considering issuing?...

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Finance

As of September? 2012, Google? (GOOG) had no debt. Suppose the?firm's managers are considering issuing? zero-coupon debt due in 16months with a face value of
$ 165.7
?billion, and using the proceeds to pay a special dividend.Google currently has a market value of
$ 231.3
billion and the? risk-free rate is
0.28 %
Using an implied volatility
?=38.60%?,
answer the? following:
a. If? Google's current equity beta is 1.16?,
estimate? Google's equity beta after the debt is issued.
b. Estimate the beta of the new debt.
?(?Note: Make sure to round all intermediate calculations to atleast five decimal places.?)

Answer & Explanation Solved by verified expert

4.4 Ratings (925 Votes)

All financials are in billionPart aAfter debt is issuedWe need to calculate the market value of debt and equity ofGoogle Equity can be seen as a call option on the assets of thefirm with strike price equal to See Answer

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Transcribed Image Text

As of September? 2012, Google? (GOOG) had no debt. Suppose the?firm's managers are considering issuing? zero-coupon debt due in 16months with a face value of$ 165.7?billion, and using the proceeds to pay a special dividend.Google currently has a market value of$ 231.3billion and the? risk-free rate is0.28 %Using an implied volatility?=38.60%?,answer the? following:a. If? Google's current equity beta is 1.16?,estimate? Google's equity beta after the debt is issued.b. Estimate the beta of the new debt.?(?Note: Make sure to round all intermediate calculations to atleast five decimal places.?)