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North Technology Inc. has a zero-coupon bond that matures in five years with a face value of $60,000. The current value of the companys asset
North Technology Inc. has a zero-coupon bond that matures in five years with a face value of $60,000. The current value of the companys asset is $57,000 and the standard deviation of rate of return on assets is 50% per year. The continuously compounded risk-free rate of interest is 6%.
- What are the market values of the companys debt and equity? (6 marks)
- What is the yield to maturity on North Technologys debt? (6 marks)
- What is the value of shareholders limited liability? (6 marks)
- Suppose the company can re-structure its balance sheet so that the standard deviation of its return on assets increases to 60% per year. Assuming all other things remaining the same, who (shareholders vs. bondholders) benefits from the restructuring and why? What are the magnitudes of loss/gain to each type of stakeholders? Show your calculations.
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