Question
A company has a zero coupon bond issue outstanding with a par (or face) value of $250,000,000 that matures in 30 months. The current market
A company has a zero coupon bond issue outstanding with a par (or face) value of $250,000,000 that matures in 30 months. The current market value of the firms assets is $300,000,000. The standard deviation of the returns on the firms assets (volatility) is 0.50 (or 50 percent) per year, and the annual risk-free rate is 5 percent, compounded continuously. a) The firm has a new project available. The net present value of the project is $50,000,000. If the company undertakes the project, what is the value of the firms equity based on the Black-Scholes option pricing model? What is the current value of the firms debt? Assume that volatility remains the same at 50%. b) What is the firms continuously compounded cost of debt after the project is undertaken?
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