55. Debt Valuation and Asset Variance

Brozik Corp. has a zero-coupon bond that matures in five years with a face value of $60,000. The current value of the companys assets is $57,000, and the standard deviation of its ROA is 50 percent per year. The risk-free rate is 6 percent per year, compounded continuously.

a) Assume the company can restructure its assets so that the standard deviation of its return on assets increases to 60 percent per year. What is the new value of the debt?

b)What is the new continuously compounded yield on the company's debt?

c)If the company restructures its assets, how much will bondholders gain or lose?

d)If the company restructures its assets, how how much will stockholders gain or lose?