Question
Assume perfect capital markets when solving this problem. Depending on the product in the market, the company estimates they will either have a value of
Assume perfect capital markets when solving this problem. Depending on the product in the market, the company estimates they will either have a value of $100 million, $250 million, or $300 million next year (equal probability for all 3 outcomes). Assume the project has a beta of 0 and the risk free rate is equal to cost of capital equity being at 5%. Assume perfect capital markets. If Company As assets decrease by 20% (because of bankruptcy) assume the company has a zero-coupon debt with a $150 million face value that must be given the following year. What is the total leverage of Company A today closest to?
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