Consider a firm whose only asset is a plot of vacant land, and whose only liability...

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Consider a firm whose only asset is a plot of vacant land, and whose only liability is debt of $14.6 million due in one year.

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Answer 1

Answer #1

1) If the Firm choses to not develop the land,

Present Value of Land = Present Value of Debt + Present Value of Equity

$ 10.4 x (1/1.105) = $ 14.6 x (1/1.105) + Present Value of Equity

Present Value of Equity = 9.41 - 13.21 = $ -3.80

2) NPV of developing the land = $ 34.3 x (1/1.105) - $ 20.1 = 31.04 - 20.1 = $ 10.94

3) The value of firms equity = $ 10.94 + $ -3.80 = $ 7.14 , The Present value of debt will be 13.21 (no change in debt as entire money raised from equity shareholders)

4) Yes, as the Equity turns positive as stated above

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Answer 2

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