D3 Century Aluminium owns assets that have a 70% probability of having a market value of$850M and a 30% probability that the company will default next year. The firm will notgenerate cash flows thereafter. The current risk-free rate is 5%.Suppose Century has outstanding debt that has a market value today of $500M and is due inone year. The cost of debt is 6.25% and the unlevered cost of equity is 7%. The capitalmarket is perfect, if Century promised to pay its creditors an interest payment $50 next year,what is the value of the assets of the company in the default scenario?$466.7$531.3$487.5$500.0

In finance, concepts such as probability, present value, cost of debt, cost of equity, and default…

Answered: Century Aluminium owns assets that have…

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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Piper Specialty Store Ltd. completed the following merchandising transactions in the month of May 2021. At the beginning of May, Piper's ledger showed Cash $7,000; Accounts Receivable $1,900; Inventory $3,500; Common Shares $7,800; and Retained Earnings $4,600. Piper Specialty has experienced a return rate of 2% of sales and uses a perpetual inventory system. Purchased merchandise on account from Depot Wholesale Supply Ltd. for $5,340, terms 1/10, n/30, FOB shipping point. May 3 Freight charges of $137 were paid by the appropriate party on the merchandise purchased on May 1. Sold merchandise on account to Yip Company for $3,500, terms n/30, FOB destination. The cost of the merchandise was $2,400. 7 Freight charges of $86 were paid by the appropriate party on the May 4 sale. 8. Received a $140 credit from Depot Wholesale Supply when merchandise was returned. Paid Depot Wholesale Supply in full. 11 Purchased supplies for $390 cash. 14 Received payment in full from Yip Company for…
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