The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050. Refer to the data for Wilson Dover Inc. What is the yield on Wilson Dover's debt?

The yield on Wilson Dover's debt is 7.42%

Explanation:

In order to calculate the yield on Wilson Dover's debt we would have to calculate first the value of debt as follows:

value of debt=Total value*N(d1)-Debt*e∧-r fx period*N(d2)

value of debt=$500 million*0.9720-$200 million*2.7183∧-0.05*1*0.9050

value of debt=$486 million-$200 million*0.951229*0.9050

value of debt=$486 million-$172.1724 million

value of debt=$313.8276 million

=Total Value-Value of debt

=$186.17 million

The value of debt is $186.17 million

So, to calculate the yield we have to use the following formula:

Yield=(Face Value/current value)∧1/period-1

Yield=($200 million/$186.17 million)∧1-1

Yield=1.074286942-1

Yield=7.42%

The yield on Wilson Dover's debt is 7.42%

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