Question

Acort Industries owns assets that will have a(n) 65% probability of having a market value of $41 million in one year. There is a 35% chance that the assets will be worth only $11 million. The current risk-free rate is 6%, and Acort's assets have a cost of capital of 12%. a. If Acort is unlevered, what is the current market value of its equity? b. Suppose instead that Acort has debt with a face value of $11 million due in one year. According to MM, what is the value of Acort's equity in this case? c. What is the expected return of Acort's equity without leverage? What is the expected return of Acort's equity with leverage? d. What is the lowest possible realized return of Acort's equity with and without leverage?

Answer 1

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PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins Formulas Data Review - 2x = = = Dr General 11AA . A Wrap Text Merge & Center - Merge & Center - Σ AutoSum : A Fill Z Sort & E E $ $ -% % ; 8 ... Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format Clear Filter Editing Find & Select Alignment Number Cells File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter B I U. Clipboard Font SM157 - for 2 SC SD SE 142 143 144 145 146 147 SE SG SH SI SJ SK SL - SM SN so Spa а expected value of assets = 0.65 x 41+0.35 x 11 = value of unlevered firm = 30.50/(1+0.12) = value of equity assuming Acort is unlevered = 30.50 27.23 [rounded to 2 decimals] 27.23 148 11 debt due in one year = risk free rate = value of debt = 11/(1+0.06)= value of equity = value of unlevered firm - value of debt 6% 10.38 [rounded to 2 decimals] 16.85 [27.23-10.38] 149 150 151 152 153 154 155 156 157 158 159 expected return of equity (without leverage) = expected return of equity (with leverage) = 30.50/27.23 - 1 = (30.5-11)/16.85 - 1= 12.00% 15.69% d lowest possible realized return worst possible return = 11 so expected return of equity (without leverage) = expected return of equity (with leverage) = (11-0)/27.23 - 1 = (11-11)/16.85 - 1= -59.61% -100.00% 160 161 STOCK DIV NAV HEDGE FUND ME EV PE EPS DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS R Rea HIGH LOW TARGET PRICE ferences 0 (+) price quote EVA MVAI | THE TU 120% = OENG DEF 29-11-2019