Acort Industries owns assets that will have a(n)

80%

probability of having a market value of

$49

million in one year. There is a

20%

chance that the assets will be worth only

$19

million. The current risk-free rate is

6%,

and Acort's assets have a cost of capital of

12%.

a. If Acort is unlevered, what is the current market value of its equity?

b. Suppose instead that Acort has debt with a face value of

$12

million due in one year. According to MM, what is the value of Acort's equity in this case?

c. What is the expected return of Acort's equity without leverage? What is the expected return of Acort's equity with leverage?

d. What is the lowest possible realized return of Acort's equity with and without leverage?

Question content area bottom

Part 1

a. If Acort is unlevered, what is the current market value of its equity?

The current market value of the unlevered equity is

$enter your response here

million.(Round to three decimal places.)

Part 2

b. Suppose instead that Acort has debt with a face value of

$12

million due in one year. According to MM, what is the value of Acort's equity in this case?According to MM, the current market value of the levered equity is

$enter your response here

million. (Round to three decimal places.)

Part 3

c. What is the expected return of Acort's equity without leverage? What is the expected return of Acort's equity with leverage?

The expected return of Acort's equity for both cases is:

	Expected Return
Without Leverage:	enter your response here% (Round to two decimal places.)
With Leverage:	enter your response here% (Round to two decimal places.)

Part 4

d. What is the lowest possible realized return of Acort's equity with and without leverage?

The lowest possible realized return of Acort's equity in both cases will be:

	Realized Return
Without Leverage:	enter your response here% (Round to two decimal places.)
With Leverage:	enter your response here% (Round to two decimal places.)