Question
15. In the MM perfect markets world, consider a firm with a single project that will worth either $100 or $200 in one year with
15. In the MM perfect markets world, consider a firm with a single project that will worth either $100 or $200 in one year with equal probability. If the firm issues debt with a face value (promised payment) of $55(LD firm). The appropriate discount rate for the project is 10%. What is the value of the firms equity? What is the value of the equity if the firm were to issue debt with a face value of $110 (HD firm)? How would I buy the equivalent of )10% of the HD firm equity if the only securities for sale are the debt and equity of the LD firm (in other words ow much LD equity and LD debt would I need to own)? (Ch 17)
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