Question

A company has a single zero coupon bond outstanding that matures in five years with a face value of $41 million. The current value of the company’s assets is $31 million, and the standard deviation of the return on the firm’s assets is 37 percent per year. The risk-free rate is 5 percent per year, compounded continuously.

      

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

  

Current market value

$

  

b.	What is the current market value of the company’s debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Current market value

$

  

c.	What is the company’s continuously compounded cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Cost of debt

%

  

d.	The company has a new project available. The project has an NPV of $3,000,000. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Market value of equity

$

  

e.	Assuming the company undertakes the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Cost of debt

%

Answer 1

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- 2x r = 352 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 11 AA = = = Dr Wrap Text General Ea Copy Fill Paste B I U B- E A E E s FMerce Merge & Center - Center $ -% % 4.0 .00 . Format Painter Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing QL350 fax QD QE QE QG QH Q Q QK QL 346 347 zero coupon bond 348 S= 31000000 CURRENT VALUE 349 K= 41000000 FACE VALUE 350 0.05 351 O (A) = 0.37 T = 5 353 d en (S/k) + (r+0.55 354 (T) 355 356 357 d1 = [In(31000000/41000000) + (0.05 +0.5*(0.37)^2)(5)]/(0.37*(SQRT(5)] 358 d1 = 0.3779 360 361 d2 = d1 - 0* SQRT(T) 362 d2 = -0.4494 363 364 365 N(D1) = 0.647253 e^(-0.05*5) = 0.778801 366 N(D2) = 0.326560 H 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 MVAIC Rea ferences: AL125 BO! 120% 2. B 9 . * * O 359 - _+ ENG 27-11-2019

PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Σ AutoSum : A Fill Clear Sort & Filter Editing Find & Select Q L Calibri 11 AA = = = Dr Wrap Text General E Copy Paste BI U D- DA Format Painter Merge & Center - $ % , Conditional Format :.: Cell Insert Delete Format Formatting as Table Styles Clipboard Font Alignment Number Styles Cells QL386 fox QD QE QE QGQH QI QI QK 367 368 Value of equity - S. n(d, - k.e . N(dz) 370 371 372 VALUE OF EQUITY = 31000000*(0.647253) - (41000000 * e^(-0.05 *5)(0.326560)) 373 20064833.06 10427340.65 374 9637492.41 YT 369 375 376 VALUE OF DEBT = MARKET VALUE OF ASSETS - VALUE OF EQUITY 31000000 9637492.41 21362507.59 377 378 379 380 381 382 383 THE RETURN ON COMPANY'S DEBT IS: FV = PV*Ar(T) 41000000 = 21362507.59*Ar(5) 1.91925 =er(5) r (5)= In(1.91925) r= 13.04% 384 385 386 387 H Rea 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 MVAIC | THE TU 120% - 9 * * O ENG 2. B 27-11-2019

PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Σ AutoSum : A 11 AA = = = Dr Wrap Text General Fill Z Tu BEHARREA D A E Merge & Center - $ & ... % Number Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Clear Sort & Find & Filter Select Editing Alignment Calibri E Copy Paste Format Painter BIU Clipboard QL407 - QD 388 389 Cells Font fax E Q QK QL 390 QF QG QH QI NPV = 3000000 zero coupon bond S= 34000000 [31000000 + 3000000] K= 41000000 0.05 O (A) = 0.37 T = 5 391 392 393 394 395 396 397 398 399 d en (S/k) + (r+0.55 (T) d1 = [In(34000000/41000000) + (0.05 +0.5*(0.37)^2)(5)]/(0.37*(SQRT(5)] 400 d1 = 0.4896 d2 = d1 - d2 = 0* SQRT(T) -0.3378 401 402 403 404 405 406 407 408 H Rea e^(-0.05*5) = 0.778801 N(01) = 0.687779 N(D2) = 0.367764 NAV HEDGE FUND ME EV PE EPS DIV STOCK DIV ABNORMAL deberk MARGIN MONEY marginal tax PB ROPI APV ROSS HIGH LOW TARGET PRICE ferences: AL125 0 (+) price quote EVA MVAIC | THE TU 120% - 9 * * O ENG 2. B 27-11-2019

PE EPS, STOCK DIVIDEND - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Insert Page Layout Formulas Data Review - 2x % Cut Σ AutoSum : A Dr General Wrap Text Merge & Center - U $ :.: Insert Delete Format % , Number Conditional Format Formatting as Table Styles Cell Styles 11 AA = = = D- DA Font foc QE QE Fill Clear Sort & Filter Editing Find & Select Alignment Cells QG QH QI QJ Q K YT Nd2) Value of equity - Son(d, -koe Calibri E Copy Paste Format Painter BI Clipboard QL428 QD 409 410 411 412 413 414 415 416 417 418 419 420 VALUE OF EQUITY = 34000000*(0.687779) - (41000000 * e^(-0.05 *5)(0.367764)) 23384479.06 11743013.19 11641465.88 VALUE OF DEBT = MARKET VALUE OF ASSETS - VALUE OF EQUITY 34000000 11641465.88 22358534.12 421 422 423 424 425 THE RETURN ON COMPANY'S DEBT IS: FV = PV* ear() 41000000 = 22358534.12* e^(5) 1.83375 rear(5) r (5) = n(1.83375) r= 12.13% 426 427 428 429 H Rea 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 MVAIC | THE TU 120% - 9 * * O ENG 2. B 27-11-2019