Question
A company has a single zero coupon bond outstanding that matures in five years with a face value of $17.5 million. The current value of
A company has a single zero coupon bond outstanding that matures in five years with a face value of $17.5 million. The current value of the companys assets is $15.9 million, and the standard deviation of the return on the firms assets is 41 percent per year. The risk-free rate is 6 percent per year, compounded continuously. |
a. | What is the current market value of the companys equity?
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b. | What is the current market value of the companys debt?
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c. | What is the companys continuously compounded cost of debt?
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d. | The company has a new project available. The project has an NPV of $2.2 million. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged.
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e. | 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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