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 not generate 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 in one year. The cost of debt is 6.25% and the unlevered cost of equity is 7%. The capital market 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
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 not generate 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 in one year. The cost of debt is 6.25% and the unlevered cost of equity is 7%. The capital market 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
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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Transcribed Image Text: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 not
generate 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 in
one year. The cost of debt is 6.25% and the unlevered cost of equity is 7%. The capital
market 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
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