1. 8.

Equity as an option [LO 24.4] Kallangur Industries has a bond issue with a face value of $1 000 that is coming due in one year. The value of the company’s assets is currently $1 040. Urban Meyer, the CEO, believes that the assets in the company will be worth either $940 or $1 270 in a year. The going rate on one-year Treasury notes is 4.8 per cent.

1. What is the value of the company’s equity? The value of the debt?

2. Suppose the company can reconfigure its existing assets in such a way that the value in a year will be $850 or $1 750. If the current value of the assets is unchanged, will the shareholders favour such a move?

Why or why not?