Question
Stevens Investment Properties holds a diversified portfolio of stocks, and has essentially no other assets. The total value of Stevens assets is $200 million. The
Stevens Investment Properties holds a diversified portfolio of stocks, and has essentially no other assets. The total value of Stevens assets is $200 million. The continuously compounded return on these assets is normally distributed, with a standard deviation of 25% per year. Stevens is owned by three groups of investors: senior debt, with a face value of $140 million; junior debt, with a face value of $100 million; and equity. Both the junior and senior debt mature in four years, and neither will receive any interest payments before maturity. Covenants in the debt contracts prohibit Stevens from making any dividend payments before the junior and senior debt are paid in full. If the risk free interest rate will be 4% a year for the next three years, what is the value of each slice of the portfolio? Ignore transaction costs and show your work..
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