Question

Rackin Pinion Corporation’s assets are currently worth $1,170. In one year, they will be worth either $1,130 or $1,420. The risk-free interest rate is 5 percent. Suppose the company has an outstanding debt issue with a face value of $1,000.

a.	What is the value of the equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Equity value

$

b-1	What is the value of the debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Debt value

$

b-2	What is the interest rate on the debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number, e.g., 32.)

Interest rate

%

c.	Would the value of the equity go up or down if the risk-free rate were 7 percent?
	Increase Decrease

Answer 1

a) Equity value $217.62 =1170-1000/(1+5%) b-1) Debt value $952.38 -1170-217.62 b-2) Interest rate 5.00% -1000/952.38-1 c) Increase

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