Question

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $11,000 face value that matures in one year. The current market value of the firm's assets is $13,100. The standard deviation of the return on the firm's assets is 34 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $1,600, and Project B has an NPV of $2,400. As the result of taking Project A, the standard deviation of the return on the firm's assets will increase to 48 percent per year. If Project B is taken, the standard deviation will fall to 19 percent per year. a-1. What is the value of the firm's equity and debt if Project A is undertaken? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Market value Equity Debt a-2. What is the value of the firm's equity and debt if Project B is undertaken? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16) Market value Equity Debt

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

- 2x % Cut HQ - PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins Calibri Σ AutoSum : A 11 A A = = = V Wrap Text General E Copy Fill Paste BIU -A E E E Merge & Center - $ % & ... Conditional Format Cell Format Painter Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing HK1112 HE HGHH HI HJHKHL HM HN HO HP 1112 1113 1114 SUNBURN PROJECT A 1115 1116 14700 [13100 +1600] 1117 K= 11000 face value 1118 r= 0.05 1119 O(A) = 0.48 T=1 1120 1121 en (Slk) + (r+0. 50 D (T) 1122 1123 1124 d1 = (In(14700/11000) + (0.05 +0.5*(0.48)^2)(1))/(0.48*(SQRT(1)) 1125 d1 = 0.9482 1126 1127 1128 d2 =d1 - 0* SQRT(T) 1129 d2 = 0.4682 1130 HE HIGH LOW TARGET PRICE STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS price quote EVA MVAJ Rea ferences: AL125 0 130% . B 9 * 10 0 + ENG 23-11-2019

- 2x HQ - PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins * Cut Σ AutoSum : A Calibri 11AA = = = Dr Wrap Text General E Copy Fill Paste B I U B- E A = 5 st Fat Merge Merge & Center - Center $ -% % Format Painter , .0 .00 . Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing HM1148 HE HG HH H HJ HK HL HM HN HO HP 1130 1131 NOTE 1132 N(01) = 0.8285 e^(-0.05*1) = 0.951229 1133 N(02) = 0.6802 1134 1135 koe S. NCd, N (dz) 1136 Value of equity - 1137 1138 1139 VALUE OF EQUITY = 14700*(0.8285) - (11000 * e^(-0.05 +1)(0.6802)) 1140 12178.87 7117.20 1141 5061.68 1142 1143 VALUE OF DEBT = MARKET VALUE OF ASSETS - VALUE OF EQUITY 1144 14700 5061.68 1145 9638.32 1146 1147 a-1 VALUE OF EQUITY = 5061.68 1148 VALUE OF DEBT = 9638.32 HE HIGH LOW TARGET PRICE STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS price quote EVA MVAJ Rea ferences: AL125 0 130% . B 9 * 10 0 + ENG 23-11-2019

PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Calibri = = = Dr General B Wrap Text Fat Merge Merge & Center - Center I 11AA B- A Font U E Copy Paste Format Painter Clipboard E = 5 st .0 .00 . Insert Delete Format $ -% % , Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Cells HN1166 HE HG HH HJ HI PROJECT B HKHL HK HM HN HO HP HQ S= K= 15500 [13100 + 2400] 11000 face value 0.05 0.19 O(B) = d en (Slk) + (r+0.55 (T) 1152 1153 1154 1155 1156 1157 1158 1159 1160 1161 1162 1163 1164 1165 1166 1167 1168 1169 1170 HE Rea d1 = (In(15500/11000) + (0.05 +0.5*(0.19)^2)(1))/(0.19*(SQRT(1)) 2.1631 d1 = d2 = d1 - d2 = o* SQRT(T) 1.9731 NOTE e^(-0.05*1) = 0.951229 N(d1) = 0.9847 N(D2) = 0.9758 STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS HIGH LOW TARGET PRICE ferences: AL125 0 + price quote EVA MVAJ 00 130% 9 * * O 2. ENG 23-11-2019

PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Calibri = = = Dr General 11AA B- A Wrap Text Fat Merge Merge & Center - Center B I E Copy Paste Format Painter Clipboard U E = 5 st .0 .00 . Insert Delete Format $ -% % , Number Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Font Alignment Cells HN1186 HE HG HH HI HJ HK HL T HM THN но HP на я NOTE e^(-0.05*1) = 0.951229 N(d1) = N(D2) = 0.9847 0.9758 S. n(d, Koe Naz) Value of equity - VALUE OF EQUITY = 1 1168 1169 1170 1171 1172 1173 1174 1175 1176 1177 1178 1179 1180 1181 1182 1183 1184 1185 1186 HE Rea 15500*(0.9847) -(11000 * e^(-0.05 *1)(0.9758)) 15263.38 10209.88 5053.50 VALUE OF DEBT = MARKET VALUE OF ASSETS - VALUE OF EQUITY 15500 5053.50 10446.50 1183 a-2 VALUE OF EQUITY = VALUE OF DEBT = 5053.50 10446.50 STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS price quote HIGH LOW TARGET PRICE ferences: AL125 EVA MVAJ 0 130% 0 + B A .lll + TO 23-11-2019