5. 7. Equity as an option [LO 24.4] Gerringong Traders Limiteds assets are currently worth $1 065....
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5. 7.
Equity as an option [LO 24.4] Gerringong Traders Limited’s assets are currently worth $1 065. In one year, they will be worth either $1 000 or $1 340. The risk-free interest rate is 3.9 per cent. Suppose the company has an outstanding debt issue with a face value of $1 000.
1. What is the value of the equity?
2. What is the value of the debt? The interest rate on the debt?
3. Would the value of the equity go up or down if the risk-free rate were 20 per cent? Why? What does your answer illustrate?
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Related Book For 
Fundamentals Of Corporate Finance
ISBN: 9781743768051
8th Edition
Authors: Stephen A. Ross, Rowan Trayler, Charles Koh, Gerhard Hambusch, Kristoffer Glover, Randolph W. Westerfield, Bradford D. Jordan
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