A company has a single zero coupon bond outstanding that matures in five years w

Question

A company has a single zero coupon bond outstanding that matures in five years with a face value of $45 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 41 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 final answer to 2 decimal places. (e.g., 32.16)) Current market value __________I b. What is the current market value of the company?s debt? (Do not round intermediate calculations and round your final 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 and round your final answer to 2 decimal places. (e.g., 32.16)) Cost of debt 3 _____ % d. The company has a new project available. The project has an NPV of $3.400.000. 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 final 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 and round your final answer to 2 decimal places. (e.g.. 32.16)) Cost of debt %

Explanation / Answer

A.the comoany equity value is 0 as its value of asset is less than the value of debt.

B.Current market value of debt is 31 million.

C.The cost of debt is YTM of the 0 coupon bond, so fv is 45 million, n is 5, coupin is 0,

YTM is 7.74% this is the cost of debt.

D.current valye of asset + npv of new project is 34.4 million its still less than value of debt so market fslue if equity is 0.

F.New cost of debt will be 5.52% as pv of debt has increased to 34.4 million

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