Rackin Pinion Corporations assets are currently worth $104. In one year, they will be worth either $100

Question:

Rackin Pinion Corporation’s assets are currently worth $104. In one year, they will be worth either $100 or $129. The risk-free interest rate is 5 percent. Suppose Rackin Pinion has an outstanding debt issue with a face value of $100.

a. What is the value of the equity?

b. What is the value of the debt? The interest rate on the debt?

c. Would the value of the equity go up or down if the risk-free rate were 20 percent? Why? What does your answer illustrate?

Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...