You are considering investing in a firm that is in financial distress. While the assets are...

You are considering investing in a firm that is in financial distress. While the assets are valued at $25 million, the face value of its debt is $38 million (i.e.: it owes more than the value of its assets). Regular valuation techniques would indicate that the value of equity for this firm is zero (as it can't be negative). However, you want to apply Real Option Valuation to see if it's worth investing. The standard deviation of the firm asset's value is 20%, the risk-free rate is 5%. The debt is zero-coupon bonds, which matures in 4 years. In addition, an analysts in your team has already computed the option pricing Normal Distribution probabilities, so you know that N(d1)=0.356, and N(d2)=0.232. What is the value of equity for this firm?

Solutions

Expert Solution

N(d1) AND N(d2) VALUES ARE TAKEN AS 0.356 AND 0.232, GIVEN BY YOU

THE VALUES OF N(d1) AND N(d2) ARE COMING DIFFERENT FOR MY CALCULATIONS

ANSWER IS IN MILLIONS ONLY, ROUNDED TO 2 DECIMALS

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

You are considering investing in a firm that is in financial distress. While the assets are...

You are considering investing in a firm that is in financial distress. While the assets are valued at $50 million, the face value of its debt is $92 million (i.e.: it owes more than the value of its assets). Regular valuation techniques would indicate that the value of equity for this firm is zero (as it can't be negative). However, you want to apply Real Option Valuation to see if it's worth investing. The standard deviation of the firm asset's...

Consider a firm in financial distress (i.e. its assets are worth much less than the face...

Consider a firm in financial distress (i.e. its assets are worth much less than the face amount of its outstanding debt, which is due in two years). For each scenario below, please briefly explain who stands to gain and who stands to lose among the firm’s owners? Focus on the incremental gain or loss in value for each party that each scenario may entail. The company manages to scrape together cash and distributes it as dividends The lenders accept to...

A firm is considering investing in a new project. According to its cost of capital while...

A firm is considering investing in a new project. According to its cost of capital while using debt, preferred stock and new common stock, the project is expected to have an initial after-tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4. A firm has determined its optimal capital structure, which is composed of the following sources...

A firm is considering investing in a new project. According to its cost of capital while...

A firm is considering investing in a new project. According to its cost of capital while using debt, preferred stock and new common stock, the project is expected to have an initial after tax cost of $5,000,000. Furthermore, the project is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4. A firm has determined its optimal capital structure, which is composed of the following...

A firm is considering investing in a new project. According to its cost of capital while...

You are considering investing in three assets. Asset A has an expected return of 15% and...

You are considering investing in three assets. Asset A has an expected return of 15% and standard deviation of 32%. Asset B has an expected return of 9% and standard deviation of 23%. Asset C is risk-free with an expected return of 5.5%. The correlation between A and B is 0.25. a) What is the expected return and standard deviation of the optimal risky portfolio? (2) b) Suppose your portfolio must yield an expected return of 12% and be efficient....

Paul is considering investing in a portfolio with two assets a and b. The following is...

Paul is considering investing in a portfolio with two assets a and b. The following is his prediction about future return of a and b in the next year: probability Asset a. Asset b 20% 12% 15% 30% 10% 12.5% 40% 7.5% 8% 10%. 5%. 4.5% a. Calculate the expected return and standard deviation of asset a and b b. If Paul is going to invest 40% of his wealth on asset a and the remaining to asset b, what...

A firm is considering diversifying and investing in a line of business in an industry in...

A firm is considering diversifying and investing in a line of business in an industry in which the firm does not currently operate. In doing some research, you determine the new industry has an average equity beta of 1.09, an average debt-to-equity ratio of 15% ,and an average tax rate of 40%. Your firm has a debt ratio of 20%, but the same average tax rate of 40%. Assume that debt betas in the firm and new industry are zero....

A 10-year bond of a firm in severe financial distress has a coupon rate of 16%...

A 10-year bond of a firm in severe financial distress has a coupon rate of 16% and sells for $940. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What is (a) the stated and (b) the expected yield to maturity of the bonds? The bond makes its coupon payments annually

A 15-year bond of a firm in severe financial distress has a coupon rate of 12%...

A 15-year bond of a firm in severe financial distress has a coupon rate of 12% and sells for $935. The firm is currently renegotiating the debt, and it appears that the lenders will allow the firm to reduce coupon payments on the bond to one-half the originally contracted amount. The firm can handle these lower payments. What is (a) the stated and (b) the expected yield to maturity of the bonds? The bond makes its coupon payments annually. Stated...

Subjects