Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Dear tutor, could you please answer the following numericals? Than k you in advance. A) Assume your company is financed by equity and risky debt,

Dear tutor, could you please answer the following numericals? Than k you in advance.

A) Assume your company is financed by equity and risky debt, where the debt-equity ratio of your company equals 1.13. Following your estimation, the expected return on equity is 23.84 percent and the weighted average cost of capital is 19.25 percent. You also know that the risk-free rate is 3.21 percent and the market return is 10.77 percent. Without taking taxes into consideration what is the debt beta of your company?

B) Assume assets of your company amount to 5222 and show volatility at the level of 27.37%. The face value of debt is 2408 and has a maturity of 4 years. If the assets rate of return is 18.75%, what distance to default do the assets of your company show?

C) The assets of a company are worth 3000. Its expected continuously compounded rate of return amounts to 13% while the volatility of the company's assets is 29%. One year ago, the corporation raised a loan at a bank, which was issued as a zero bond with a maturity of five years and a repayment of 2450. There is no further debt. The current term structure of (continuously compounded) interest rate is the following:

maturity 1 year 2 years 3 years 4 years 5 years
spot rate 2.59% 2.80% 3.00% 3.19% 3.37%

Calculate the credit spread.

D) Assume the assets of your company amounts to 5 000 with the volatility of 21 percent and the face value of debt is 2 000 with a maturity of 5 years. If the risk-free rate of return is 5 percent, calculate the elasticity of debt(D).

E) The value of assets amounts to 1,700,000 , the expected instantaneous rate of return and corresponding volatility are 8 and 13 percent. Time to maturity of the outstanding debt is 1 year. Investors expect a payoff of equity at the level of 640,963.47 . Calculate the face value of debt given d1 tilde 3.36 in the framework of Merton's model.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting

Authors: Michelle L. Hanlon, Robert P. Magee, Glenn M. Pfeiffer, Thomas R. Dyckman

6th Edition

1618533118, 978-1618533111

More Books

Students also viewed these Accounting questions

Question

=+5. How does playing video games inspire flow?

Answered: 1 week ago