ou're the CFO of a small private computer technology company that has been negotiating a potentially lucrative contract with Microsoft which is seeking to outsource their data storage to your firm. Microsoft will make their decision in 6 months on 30th June. If your firm is:

-Successful, the firm's assets will be worth $100m in 6 months. You believe theres a 40% probability of success.

-Unsuccessful, the firm's assets will be worth only $1m in 6 months. Theres a 60% chance this will happen.

Unfortunately your firm owes a large bullet loan, requiring a $9m principal payment in 6 months on 1st July (the day after the Microsoft contract decision).

If the Microsoft contract falls through, your firm will fold and be unable to fully repay the loan. If the contract is successful, your firm will easily be able to refinance the loan.

The risk free rate is 10% pa as an effective annual rate.

Which of the following statements about this scenario is NOT correct? All figures are rounded to 3 decimal places. In a risk-neutral world, right now the firms:

Select one:

a.

Equity is worth $34.706m.

b.

Debt is worth $4.005m.

c.

Assets are worth $38.711m.

d.

Debt has a promised yield-to-maturity of 49.915% pa as an effective annual rate.

e.

Equity value will increase by more than its asset value if the probability of success increases.

Youre the sole shareholder of a private company that made $1m EBITDA last year. Based on similar firms EV/EBITDA ratios of 6, your firms enterprise value is $6m. Your firm currently has very little cash so the asset value is also $6m. Your firm is not expected to pay dividends or buybacks for the next 5 years, same as other firms in your industry.

Your firm has a single liability which is a $4m face value zero-coupon bond due in 5 years.

You estimate that the firms assets will be worth either $14.6756m or $2.4531m in 5 years.

Zero coupon government bonds maturing in 5 years yield 5% pa given as continuously compounded rate.

You attempt to use a one-period binomial tree to value your firms debt and equity.

Which of the below statements about your firm is NOT correct? All figures have been rounded to 4 decimal places.

Select one:

a.

The risk-neutral probability of an increase in the asset value from $6m to $14.6756m in 5 years is 34.8264%.

b.

The equity value is $3.3246m.

c.

The debt value is $3.1152m.

d.

Using the no-arbitrage approach to pricing the binomial tree, the delta is 0.8734.

e.

Using the no-arbitrage approach to pricing the binomial tree, shorting the equity and buying 87.34% of the firms assets will lead to a risk-free portfolio value of $2.1426m in 5 years regardless of whether the assets value rises to $14.6756m or falls to $2.4531m.