Merit Inc. has zero coupon debt outstanding that will have tobe repaid in three years, with a face value of $80.00 million.The risk-free interest rate is 4.19% per annum (continuouslycompounded). You estimate that the firm's asset volatility is17.39% per annum and that its assets are currently worth$102.00 million. It doesn't pay dividends.Use Merton's model to estimate the value of Merit's equity.Write your answer in million of dollars.

Equity in finance signifies ownership interest in a company and is a crucial element of its capital…

Answered: Merit Inc. has zero coupon 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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The enterprise value of the BestAttempt Corporation is $310 million. The company has issued a zero-coupon bond with a face value of $200 million which expects to mature in five years. The expected rate of change of the ﬁrm's value is 25%. The ﬁrm's assets have an annual volatility (standard deviation) of 30%. Assume that ﬁrm value is lognormally distributed, with constant volatility. You are required to estimate the distance to default using the Merton model. What are/is the main limitation/s of the Merton model? Explain
Consider two firms, Rosehill Corporation and Purwell Industries that are each expected to pay the same $2.5 million dollar dividend every year in perpetuity. Rosehill Corporation is riskier and has an equity cost of capital of 15%. Purwell Industries is not as shaky as Rosehill, so Purwell has an equity cost of capital of only 10%. Assume that the market portfolio is not efficient. Both stocks have the same beta and an expected return of 13%. The alpha for Rosehill is closest to: 3% -3% -2% 2%
Runtan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's dividends to grow by 6% forever. Its stock price is $34.8 and its beta is 1. The risk-free rate is 2% and the expected return on the market portfolio is 8%. What is the best guess for the cost of equity?
You are going to value Lauryn’s Doll Co. using the FCF model. After consulting various sources, you find that Lauryn's has a reported equity beta of 1.7, a debt-to-equity ratio of .7, and a tax rate of 21 percent. Assume a risk-free rate of 3 percent and a market risk premium of 8 percent. Lauryn’s Doll Co. had EBIT last year of $59 million, which is net of a depreciation expense of $5.9 million. In addition, Lauryn's made $7.3 million in capital expenditures and increased networking capital by $2.4 million. Assume the FCF is expected to grow at a rate of 4 percent into perpetuity. What is the value of the firm?
NewLinePhone Corp. is very risky, with a beta equal to 2.8 and a standard deviation of returns of 32%. The risk-free rate of return is 3% and the market risk premium is 8%. NewLinePhone's marginal tax rate is 35%. Use the capital asset pricing model (CAPM) to estimate NewLinePhone's cost of retained earnings. (*You must show your calculation process as well.)
The risk-free rate is 3% per annum with continuous compounding. The price of stock LUV is $85, and its stock-price volatility is 25% per annum. LUV currently does not pay a dividend. What is the price of a 3-month at-the-money American call on LUV? A.$2.94 B.$3.67 C.$5.06 D.$4.54
Suppose the risk-free rate is 2.61% and an analyst assumes a market risk premium of 6.65%. Firm A just paid a dividend of $1.19 per share. The analyst estimates the ẞ of Firm A to be 1.31 and estimates the dividend growth rate to be 4.79% forever. Firm A has 288.00 million shares outstanding. Firm B just paid a dividend of $1.89 per share. The analyst estimates the ẞ of Firm B to be 0.87 and believes that dividends will grow at 2.28% forever. Firm B has 196.00 million shares outstanding. What is the value of Firm B? Submit Answer format: Currency: Round to: 2 decimal places. Show Hint

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