7. [Calculating firm value with options] SUNNY Inc. has a bond issue with a face value...

7. [Calculating firm value with options] SUNNY Inc. has a bond issue with a face value of $1,000 that is coming due in one year. The value of the company’s assets is currently $1,040. Dr. Min, the CEO, believes that the assets in the company will be worth either $940 or $1,270 in a year. The going rate on one-year T-bills is 4.8% i. What is the value of the company’s equity? ii. What is the value of the debt? iii. What is the interest on debt? iv. Suppose the company can reconfigure its existing assets in such a way that the value in a year will be $850 or $1,750. If the current value of the assets is unchanged, will the stockholders favor such a more?

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