Suppose a company has the chance to make an investment that will result in a profit of 10 billion if it is successful but the company will be worthless and go bankrupt if the investment is unsuccessful. The firm has bonds that pay 8% annual interest rate and have a value of $1,000 per bond and stock that sells for $12 per share. If the new project is successful, the price of the stock will jump to $18, but the value of bonds will remain $1,000 per bond. The probability of successes is 40% and the probability of failure is 60%. What is the expected return on bond?

Suppose a company has the chance to make an investment that will result in a profit of 10 billion if it is successful but the company will be worthless and go bankrupt if the investment is unsuccessful. The firm has bonds that pay 8% annual interest rate and have a value of $1,000 per bond and stock that sells for $12 per share. If the new project is successful, the price of the stock will jump to $18, but the value of bonds will remain $1,000 per bond. The probability of successes is 40% and the probability of failure is 60%. What is the expected return on bond?

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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Suppose that we have a firm whose current value is Kshs 1000 and that (given a multiplicative stochastic process) its value could go up by 12.75% or down by 11.31% and a standard deviation of 12% per annum and the risk free rate is 8%. The equity of this firm is subordinated to debt that has a face value of Kshs. 800 maturing in three years and that pays no coupon. What is the value of an American call option written on the equity if its exercise price is Kshs. 400 and its maturity is three years?
Suppose that Papa Bell Inc. equity is currently selling for $41 per share, with 3.6 million shares outstanding. The firm also has 8000 bonds outstanding, which are selling at 95% of par. Assume Papa Bell was considering an active change to its capital structure so as to have a D/E ratio of 0.5. Which type of security (stocks or bonds) would the firm need to sell to accomplish this? How much would it have to sell? (Enter your answer in dollars not in millions. Do not round immendiage calculations and round your final answer to 2 decimal places.)
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You are a venture capitalist and have been approached by Cirrus Electronics, aprivate firm. The firm has no debt outstanding and does not have earnings now but isexpected to be earning $15 million in four years, when you also expect it to go public.The average price-earnings ratio of other firms in this business is 50.a. Estimate the exit value of Cirrus Electronics.b. If your target rate of return is 35 percent, estimate the discounted terminal valueof Cirrus Electronics.c. If you are contributing $75 million of venture capital to Cirrus Electronics, at aminimum what percentage of the firm value would you demand in return?
DMX Corporation pays a constant dividend of $10 per share, but the dividend will be paid for only eight more years. In a world with a required return on this sort of investment of 8%, what is the present value of this stock? What is the stock price? What is the value of this eight-year annuity? [All three of these questions have the same answer!] O $57.47 O $73.60 $60.00 O $51.20 O $53.35
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Franklin Co has a dividend payout ratio of 0.8 and reinvests the remainder of earnings in projects with expected return of 13%. If you expect next year's EPS (EPS1) to be $2.85and investors require a return of 8.1%, what is a fair price for the stock today? Round your answer to the nearest penny.
A firm does not currently pay dividends. However, 10 years from today the firm will pay a dividend of $2.00 per share (i.e., the dividend per share at t=10 is equal to $2.00). Thereafter, dividends will grow at 3% per year indefinitely. What price would you pay today for one share of stock if the equity cost of capital is 7%? (Hint: draw a cash flow timeline!) O A. $50.00 O B. $27.20 O C. $46.73 D. $25.42
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Hi, How do I solve these corporate finance problems? Without using Excel Thanks

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