Question 5 A company consists of a machine that will produce cash flows of $450 one...

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Question 5 A company consists of a machine that will produce cash flows of $450 one year from today if the economy is good and $150 if the economy is bad. The economy is good or bad each with 50% probability. Assume for simplicity that the risk-free rate and market risk premium are zero (so that there is no discounting, and thus the value of a claim today is equal to the expected payoff to the claimholder one year from today) and that there are no taxes. The company has 100 shares outstanding and debt with a face value of $200 due at the end of the year. 5a) (6 points) What is the company's share price (i.e., the market value of one of its shares)? 5b) (7 points) Suppose that the company unexpectedly announces that it will issue additional debt with the same seniority as existing debt (i.e., pari passu) and a face value of $100. The company will use the entire proceeds to repurchase some of its outstanding shares. What is the market price of the new debt? 5c) (7 points) Just after the announcement described in part b, what will the price of a share of the company's stock be? Question 5 A company consists of a machine that will produce cash flows of $450 one year from today if the economy is good and $150 if the economy is bad. The economy is good or bad each with 50% probability. Assume for simplicity that the risk-free rate and market risk premium are zero (so that there is no discounting, and thus the value of a claim today is equal to the expected payoff to the claimholder one year from today) and that there are no taxes. The company has 100 shares outstanding and debt with a face value of $200 due at the end of the year. 5a) (6 points) What is the company's share price (i.e., the market value of one of its shares)? 5b) (7 points) Suppose that the company unexpectedly announces that it will issue additional debt with the same seniority as existing debt (i.e., pari passu) and a face value of $100. The company will use the entire proceeds to repurchase some of its outstanding shares. What is the market price of the new debt? 5c) (7 points) Just after the announcement described in part b, what will the price of a share of the company's stock be?