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The J. Miles Corp. has 25 million shares outstanding with a share price of $20 per share. Miles also has outstanding zero-coupon debt with a

The J. Miles Corp. has 25 million shares outstanding with a share price of $20 per share.

Miles also has outstanding zero-coupon debt with a 5 years maturity a face value of $900 million, and a yield to maturity

of 5%. The risk-free interest rate is 5%.

a. What is the implied volatility of Miles' assets?

b. What is the minimum profitability index required for equity holders to gain by funding a new investment that does not change the volatility of Miles' assets?

c. Suppose Miles is considering investing cash on hand in a new investment that will increase the volatility of its assets by

10%.

What is the minimum NPV such that this investment will increase the value of Miles' shares?

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