Question
Acort Industries owns assets that will have a(n) 75% probability of having a market value of $53 million in one year. There is a 25%
Acort Industries owns assets that will have a(n) 75% probability of having a market value of $53 million in one year. There is a 25% chance that the assets will be worth only $23 million. The current risk-free rate is 3%, and Acort's assets have a cost of capital of 6%.
a. If Acort is unlevered, what is the current market value of its equity? ____ million (round to 3 decimal places)
b. Suppose instead that Acort has debt with a face value of $19 million due in one year. According to MM, what is the value of Acort's equity in this case? ____ million (round to 3 decimal places)
c. What is the expected return of Acort's equity without leverage? What is the expected return of Acort's equity with leverage? ____% (round to 2 decimal places)
d. What is the lowest possible realized return of Acort's equity with and without leverage? ____% (round to 2 decimal places)
Please show all work. Thank you!
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