Look back to the first Backwoods Chemical example at the start of Section 23-1 . Suppose that the firm’s book balance sheet is:

Backwoods Chemical Company (Book Values)

Net working capital $ 400 $1,000 Debt Net fixed assets 1,600 1,000 Equity (net worth)

Total assets $2,000 $2,000 Total value The debt has a one-year maturity and a promised interest payment of 9%. Thus, the promised payment to Backwoods’s creditors is $1,090. The market value of the assets is $1,200 and the standard deviation of asset value is 45% per year. The risk-free interest rate is 9%.

Calculate the value of Backwoods debt and equity.

AppendixLO1