A company has its debt structured as a single zero-coupon bond that matures in 5 years. The face value of the debt outstanding is $40 million and the current value of the company's total assets is $36 million. The standard deviation of the return of its assets is 30 percent per year, and the risk-free rate is estimated to be about 5 percent per year, compounded continuously. Compute the following quantities: 1. Current market value of the company's equity 2. Current market value of the company's debt 3. Continuously compounded cost of debt

A company has its debt structured as a single zero-coupon bond that matures in 5 years. The face value of the debt outstanding is $40 million and the current value of the company's total assets is $36 million. The standard deviation of the return of its assets is 30 percent per year, and the risk-free rate is estimated to be about 5 percent per year, compounded continuously. Compute the following quantities: 1. Current market value of the company's equity 2. Current market value of the company's debt 3. Continuously compounded cost of debt

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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An investment of $110,000 in safe 10-year corporate bonds yields an average of 12% per year, payable each year. The effective income tax rate is 30%, and infation will average 4% per year. How much wil tir of $110,000 be worth in 10 years in today's purchasing power after income taxes and inflation are taken into account? The FW is S (Round to the nearest dollar.)
Your company follows a constant debt-to-equity ratio policy. Its debt is represented by a single zero coupon bond, with maturity one year, with face value 28,000,000 and whose value today is 24,500,000. The value of the firm’s assets in one year can be 55,000,000 with probability 40%, or 23,000,000 with probability 60%. If the unlevered return on equity is 8.50%, what is the expected return on levered equity? (Assume a Modigliani Miller world without taxation). The answer is 27.13% but how do you get to this result?
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Your company follows a constant debt-to-equity ratio policy. Its debt is represented by a single zero coupon bond, with maturity one year, with face value 28,000,000 and whose value today is 24,500,000. The value of the firm’s assets in one year can be 55,000,000 with probability 40%, or 23,000,000 with probability 60%. If the unlevered return on equity is 8.50%, what is the expected return on levered equity? (Assume a Modigliani Miller world without taxation). rE=27.13% Give typing answer with explanation and conclusion
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