Question
New Castles (NC) is a relatively risky firm that will have assets worth either $100 million, $120 million or $330 million with equal probability. Given
New Castles (NC) is a relatively risky firm that will have assets worth either $100 million, $120 million or $330 million with equal probability. Given the risk, the required rate of return on firm assets is 18%. NC also has two outstanding bonds: senior bonds with a face value of $95 million and a cost of debt of 4% and junior debt with a face value of $30 million and a cost of debt of 12%. If NC defaults on either bond, there will be an additional loss of asset value of $10 million in bankruptcy costs.
What is the current value of the senior debt?
What is the current value of the junior debt?
What is the current value of the equity?
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