A company has a single zero coupon bond outstanding that matures in five years with a...

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Finance

A company has a single zero coupon bond outstanding that maturesin five years with a face value of $39 million. The current valueof the company’s assets is $29 million and the standard deviationof the return on the firm’s assets is 39 percent per year. Therisk-free rate is 3 percent per year, compounded continuously.

a.
What is the current market value of the company’s equity?(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
b. What is the current market value of the company’s debt?(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
c. What is the company’s continuously compounded cost of debt?(Do not round intermediate calculations and enter youranswer as a percent rounded to 2 decimal places, e.g.,32.16.)
d. The company has a new project available. The project has an NPVof $2,800,000. If the company undertakes the project, what will bethe new market value of equity? Assume volatility is unchanged.(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
e. Assuming the company undertakes the new project and does notborrow any additional funds, what is the new continuouslycompounded cost of debt? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)

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4.3 Ratings (809 Votes)

a Equity will be valued as a call option using BlackScholes model Inputs Current stock price S Current asset value 29000000 Strike price K Face value of zero coupon bond 39000000 Time until expirationin years t Maturity of zero coupon bond 5000 volatility s Standard deviation of return on assets 390 riskfree rate r See Answer

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Transcribed Image Text

A company has a single zero coupon bond outstanding that maturesin five years with a face value of $39 million. The current valueof the company’s assets is $29 million and the standard deviationof the return on the firm’s assets is 39 percent per year. Therisk-free rate is 3 percent per year, compounded continuously. a.What is the current market value of the company’s equity?(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.)b.What is the current market value of the company’s debt?(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.)c.What is the company’s continuously compounded cost of debt?(Do not round intermediate calculations and enter youranswer as a percent rounded to 2 decimal places, e.g.,32.16.)d.The company has a new project available. The project has an NPVof $2,800,000. If the company undertakes the project, what will bethe new market value of equity? Assume volatility is unchanged.(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.)e.Assuming the company undertakes the new project and does notborrow any additional funds, what is the new continuouslycompounded cost of debt? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)

a.	What is the current market value of the company’s equity?(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
b.	What is the current market value of the company’s debt?(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
c.	What is the company’s continuously compounded cost of debt?(Do not round intermediate calculations and enter youranswer as a percent rounded to 2 decimal places, e.g.,32.16.)
d.	The company has a new project available. The project has an NPVof $2,800,000. If the company undertakes the project, what will bethe new market value of equity? Assume volatility is unchanged.(Do not round intermediate calculations and enter youranswer in dollars, not millions of dollars, rounded to 2 decimalplaces, e.g., 1,234,567.89.)
e.	Assuming the company undertakes the new project and does notborrow any additional funds, what is the new continuouslycompounded cost of debt? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)