Question
Answer both pls: Q21. Equity as an Option and Net Present Value Sunburn Sunscreen has a zero-coupon bond issue outstanding with a $15,000 face value
Answer both pls:
Q21. Equity as an Option and Net Present Value Sunburn Sunscreen has a zero-coupon bond issue outstanding with a $15,000 face value that matures in one year. The current market value of the firms assets is $15,800. The standard deviation of the return on the firms assets is 38 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously.
Suppose the firm is considering two mutually exclusive investments. Project A has an NPV of $1,200, and project B has an NPV of $1,600. As a result of taking project A, the standard deviation of the return on the firms assets will increase to 55 percent per year. If project B is taken, the standard deviation will fall to 34 percent per year.
Which project would the shareholders prefer?
1. Project A
2. Project B
3. Indifferent
4. Insufficient info
Q22. Equity as an Option and Net Present Value - Sunburn Sunscreen has a zero-coupon bond issue outstanding with a $15,000 face value that matures in one year. The current market value of the firms assets is $15,800. The standard deviation of the return on the firms assets is 38 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously.
Suppose the firm is considering two mutually exclusive investments. Project A has an NPV of $1,200, and project B has an NPV of $1,600. As a result of taking project A, the standard deviation of the return on the firms assets will increase to 55 percent per year. If project B is taken, the standard deviation will fall to 34 percent per year.
Suppose the shareholders and bondholders are, in fact, the same group of investors. Which project would the shareholders prefer?
1. Project A
2. Project B
3. Indifferent
4. Insufficient info
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