Answered step by step
Verified Expert Solution
Question
1 Approved Answer
A company has a single zero coupon bond outstanding that matures in five years with a face value of $26 million. The current value of
A company has a single zero coupon bond outstanding that matures in five years with a face value of $26 million. The current value of the companys assets is $19 million, and the standard deviation of the return on the firms assets is 42 percent per year. The risk-free rate is 5 percent per year, compounded continuously. |
a. | What is the current market value of the companys equity? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) |
b. | What is the current market value of the companys debt? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) |
c. | What is the companys continuously compounded cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
d. | The company has a new project available. The project has an NPV of $1,500,000. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged. (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) |
e. | Assuming the company undertakes the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started