Green Mfg is about to launch a new product. Depending on the success of the...
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Green Mfg is about to launch a new product. Depending on the success of the new product, they will have one of four values next year: 155 million, 136 million, 93 million, and 85 million. These outcomes are all equally likely, and this risk is diversifiable. Suppose the risk-free interest rate is 5%and that, in the event of default, 25%of the value of their assets will be lost to bankruptcy costs. (Ignore all other market imperfections, such as taxes.)
a. What is the initial value of Green's equity without leverage? Now suppose Green has zero-coupon debt with a 100 million face value due next year. b. What is the initial value of Green's debt? c. What is the yield-to-maturity of the debt? What is its expected return? d. What is the initial value of Green's equity? What is Green's total value with leverage?
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