Problem:
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $27,000 face value that matures in one year. The current market value of the firm's assets is $28,500. The standard deviation of the return on the firm's assets is 39 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously.
Required:
Question: Based on the Black-Scholes model, what is the market value of the firm's equity and debt?
Note: Provide support for rationale.