The company recently reorganized its debt structure at no extra expense, consolidating all liabilities into a single bond maturing in precisely $5$ years. This strategic move involved issuing new debt in an amount sufficient to retire all existing current liabilities and the long$-$term debt. Consequently, your Balance Sheet now solely consists of Owner$$s Equity and Long Term Debt. Present estimates suggest that the Market Value of the firm's assets stands at $$40$ million, with an approximate standard deviation of $23\%.$

What are the Market Value numbers for the Equity and Debt?

Following the debt restructuring, one of the company's major shareholders has requested a meeting with you and the CEO to explore several opportunities she believes could benefit all company stakeholders. The investor seeks your assistance regarding two mutually exclusive investments, each requiring $$5$ million in financing, exclusively funded by a bond with terms similar to the existing long$-$term debt. The estimated cost of issuing this bond is $5\%$ of the notional value, and we expect the bond to precisely cover the $$5$ million requirement. Both investments are projected to generate cash flows with present values of $$7\mathrm{.}5$ million.

The first investment proposal aims to consolidate operations, thereby reducing the company's overall risk. As a result, the newly estimated standard deviation of assets is approximately $18\%.$ What would be the revised Market Values of Equity and Debt following this investment?

The second investment opportunity involves introducing a new product, significantly increasing the company's risk profile. With this, the newly estimated standard deviation of assets rises to $75\%.$ What would be the updated Market Values of Equity and Debt considering this investment?

Provide an analysis of the findings from $($b$)$ and $($c$).$ Specifically, consider whether engaging in either of the investments would result in benefits for all stakeholders involved.

Given:

Income Statement

Sales $$60,000,000$ Taxes: $40\%$

COGS $$40,000,000$

Other expenses $$7,500,000$ Shares Outstanding $2,000,000$

Depreciation $$3,000,000$ Market$-$to$-$Book Ratio $1\mathrm{.}18$

EBIT $$9,500,000$ Depreciation of New Assets $15\mathrm{.}00\%$

Interest $$3,000,000$ Dividend growth in the last $7$ years $7\mathrm{.}00\%$

Taxable income $$6,500,000$

Taxes $(40\%)$ $$2,600,000$

Net income $$3,900,000$

$$

Dividends $$1,250,000$

Add to RE $$2,650,000$

Balance Sheet

Assets Liabilities & Owners$$ Equity

Current Assets Current Liabilities

Cash $$750,000$ Accounts Payable $$1,500,000$

Accounts Receivable $$1,500,000$ Notes Payable $$3,000,000$

Inventory $$2,500,000$ Total CL $$4,500,000$

Total CA $$4,750,000$ Long Term Debt $$15,000,000$

Fixed Assets Owners$$ Equity

Net PP&E $$35,000,000$ Common Stock $$9,500,000$

Retained Earnings $$10,750,000$

Total Equity $$20,250,000$

Total Assets $$39,750,000$ Total L & OE $$39,750,000$