209. Equity as an Option and NPV - A company has a single zero-coupon bond outstanding that matures in 5 years with a face value of $28 million. The current value of the companys assets is $25 million, and the standard deviation of the return on the firms assets is 45 percent per year. The risk-free rate is 3 percent per year, compounded continuously.

The company has a new project available. The project has an NPV of $2.7 million. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged.

***Assuming the company undertakes the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt?

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