GIGE has a project that will have a value of either $100 million, $150 million, or $191 million in next year, with each outcome being equally likely. GIGE is levered. It has debt in the form of a zero-coupon corporate bond with a $125 million face value due in next year. The risk-free cost of capital is 5%, the market risk premium is 10%, and the risk of default is non-systematic. In the event of default, 20% of the value of GIGE 's assets will be lost in bankruptcy costs. Assume that the capital markets are perfect. What is the initial value of GIGE 's debt? Hint: The bond’s expected return is based on the CAPM

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
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GIGE has a project that will have a value of either $100 million, $150 million, or $191

million in next year, with each outcome being equally likely. GIGE is levered. It has debt in

the form of a zero-coupon corporate bond with a $125 million face value due in next year.

The risk-free cost of capital is 5%, the market risk premium is 10%, and the risk of default

is non-systematic. In the event of default, 20% of the value of GIGE 's assets will be lost in

bankruptcy costs. Assume that the capital markets are perfect. What is the initial value of

GIGE 's debt? Hint: The bond’s expected return is based on the CAPM

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