Question
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $28,000 face value that matures in one year. The current market value of the
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $28,000 face value that matures in one year. The current market value of the firms assets is $29,900. The standard deviation of the return on the firms assets is 34 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $2,300, and Project B has an NPV of $3,200. As the result of taking Project A, the standard deviation of the return on the firms assets will increase to 51 percent per year. If Project B is taken, the standard deviation will fall to 31 percent per year. |
a-1 | What is the value of the firms equity and debt if Project A is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
Market value | |
Equity | $ |
Debt | $ |
a-2 | What is the value of the firms equity and debt if Project B is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
Market value | |
Equity | $ |
Debt | $ |
b. | Which project would the stockholders prefer? |
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c. | Suppose the stockholders and bondholders are in fact the same group of investors. Would this affect your answer to (b)? |
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