Question 11 2 pts Coasta Industries owns assets that will have an 70% probability of having a market value of $90 million in one year. There is a 30% chance that the assets will be worth only $40 million. The current risk-free rate is 4%, and Coasta's assets have a cost of capital of 12%. a. If Coasta is unlevered, what is the current market value of its equity? b. Suppose instead that Coasta has debt with a face value of $30 million due in one year. According to MM, what is the value of Coasta's equity in this case? c. What is the expected return of Coasta's equity without leverage? What is the expected return of Coasta's equity with leverage? d. What is the lowest possible realized return of Coasta's equity with and without leverage? Answer: a. The current market value of the unlevered equity is $ million. (Round to three decimal places.) b. According to MM, the current market value of the levered equity is $ million. (Round to three decimal places.) c. The expected return of Acort's equity for both cases is: (Round to two decimal places.) Expected Return Without Leverage % (Round to two decimal places.) With Leverage % (Round to two decimal places.) d. The lowest possible realized return of Coasta's equity in both cases will be: (Round to two decimal places.) Realized Return Without Leverage % (Round to two decimal places.) With Leverage % (Round to two decimal places.) Question 11 2 pts Coasta Industries owns assets that will have an 70% probability of having a market value of $90 million in one year. There is a 30% chance that the assets will be worth only $40 million. The current risk-free rate is 4%, and Coasta's assets have a cost of capital of 12%. a. If Coasta is unlevered, what is the current market value of its equity? b. Suppose instead that Coasta has debt with a face value of $30 million due in one year. According to MM, what is the value of Coasta's equity in this case? c. What is the expected return of Coasta's equity without leverage? What is the expected return of Coasta's equity with leverage? d. What is the lowest possible realized return of Coasta's equity with and without leverage? Answer: a. The current market value of the unlevered equity is $ million. (Round to three decimal places.) b. According to MM, the current market value of the levered equity is $ million. (Round to three decimal places.) c. The expected return of Acort's equity for both cases is: (Round to two decimal places.) Expected Return Without Leverage % (Round to two decimal places.) With Leverage % (Round to two decimal places.) d. The lowest possible realized return of Coasta's equity in both cases will be: (Round to two decimal places.) Realized Return Without Leverage % (Round to two decimal places.) With Leverage % (Round to two decimal places.)
