Sunburn Sunscreen has a zero coupon bond issue outstanding witha $21,000 face value that matures in one year. The current marketvalue of the firm’s assets is $22,800. The standard deviation ofthe return on the firm’s assets is 26 percent per year, and theannual risk-free rate is 5 percent per year, compoundedcontinuously.
Based on the Black–Scholes model, what is the market value ofthe firm’s equity and debt?
