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A firm with market value of assets of $750 million has issued total debt with a promised future value (PFV) of $800 million and a
A firm with market value of assets of $750 million has issued total debt with a promised future value (PFV) of $800 million and a term to maturity of 6 years. Of the PFV of total debt of $800 million, Senior Debt accounts for PFV of $300 million. You are given that the discrete risk free rate of return in 6-year markets is 5.1%, and that the volatility of the assets is 24% per year. Work out the market value of (a) Equity, (b) Senior Debt, and (c) Junior Debt. Also work out the expected return on the Senior and Junior Debt.
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