Rackin Pinion Corporation’s assets are currently worth $1,065. In one year, they will be worth either...

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Finance

Rackin Pinion Corporation’s assets are currently worth $1,065.In one year, they will be worth either $1,000 or $1,340. Therisk-free interest rate is 3.9 percent. Suppose the company has anoutstanding debt with a face value of $1,000.
A) What is the value of equity?
B) What is the value of debt? The interest rate on debt?
C) Would the value of equity go up or down if the risk-freeinterest rate were 20 percent? What does your answerillustrate?

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4.3 Ratings (585 Votes)

A Value of assets represents the enterprise value of the business Its at 1065 and debt has a face value of 1000 For the computation of equity value the face value would be used hence Enterprise value Equity value Debt 1065 Equity 1000 Hence Equity value currently is See Answer

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Rackin Pinion Corporation’s assets are currently worth $1,065.In one year, they will be worth either $1,000 or $1,340. Therisk-free interest rate is 3.9 percent. Suppose the company has anoutstanding debt with a face value of $1,000.A) What is the value of equity?B) What is the value of debt? The interest rate on debt?C) Would the value of equity go up or down if the risk-freeinterest rate were 20 percent? What does your answerillustrate?