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Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $25,000 that...
Sunburn Sunscreen has a zero coupon bond issue outstanding with a face value of $25,000 that matures in one year. The current market value of the firm’s assets is $27,200. The standard deviation of the return on the firm’s assets is 34 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $2,300, and Project B has an NPV of $3,100. As the result of taking Project A, the standard deviation of the return on the firm’s assets will increase to 48 percent per year. If Project B is taken, the standard deviation will fall to 29 percent per year.
a) What is the value of the firm’s equity and debt if Project A is undertaken?
b) What is the value of the firm’s equity and debt if Project B is undertaken?
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jeff jeffy answered 1 year agoRelated Solutions
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Sunburn Sunscreen has a zero coupon bond issue outstanding with a
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annual risk-free rate is 5 percent per year, compounded
continuously. The firm is considering two mutually exclusive
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the return on the firm’s assets is 34 percent per year, and the
annual risk-free rate is 4 percent per year, compounded
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