Buckeye Industries has a bond issue with a face value of $1,000 that is coming d
ID: 2758240 • Letter: B
Question
Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye’s assets is currently $1,290. Urban Meyer, the CEO, believes that the assets in the firm will be worth either $860 or $1,380 in a year. The going rate on one-year T-bills is 7 percent. a-1 What is the value of the company’s equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of equity $ a-2 What is the value of the debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of debt $ Suppose the company can reconfigure its existing assets in such a way that the value in a year will be $940 or $1,840. b. If the current value of the assets is unchanged, what is the new value of the company's equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Explanation / Answer
a-1)
Value of equity = Value of firm – value of debt
= 1290 -934.58
= 355.42
a-2)
Value of debt = FV/ (1+R)^n
= 1000 / (1+0.07)^1
= 934.58
b)
Value of equity = Value of firm – value of debt
= 1290 -934.58
= 355.42
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