Question

A company has a single zero coupon bond outstanding that matures in five years with a face value of $42 million. The current value of the company’s assets is $32 million and the standard deviation of the return on the firm’s assets is 38 percent per year. The risk-free rate is 4 percent per year, compounded continuously.

  

a.	What is the current market value of the company’s equity? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
b.	What is the current market value of the company’s debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
c.	What is the company’s continuously compounded cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
d.	The company has a new project available. The project has an NPV of $3,100,000. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged. (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)
e.	Assuming the company undertakes the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

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