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XYZ Industries owns assets that will have a(n) 80% probability of having a market value of $100 million in one year. There is a 20%
XYZ Industries owns assets that will have a(n) 80% probability of having a market value of $100 million in one year. There is a 20% chance that the assets will be worth only $50 million. The current risk-free rate is 4 %, and XYZ's assets have a cost of capital of 12%. (Keep two decimals, show your works)
- If the firm is unlevered, what is the current market value of its equity? (2 points, keep two decimals)
- Suppose that instead XYZ has debt with a face value of $40 million due in one year. According to M&M, what is the value of XYZs equity in this case? (2 points, keep two decimals)
- What is the expected return on equity without leverage? What is the expected return with leverage? (2 points, in %, keep two decimals)
- What is the lowest possible realized return on equity with and without leverage? (2 points, in %, keep two decimals)
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