Buckeye Industries has a bond issue with a face value of $1,000 that is coming d

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 $1,130. Urban Meyer, the CEO, believes that the assets in the firm will be worth either $960 or $1,420 in a year. The going rate on one-year T-bills is 3 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 $840 or $1,640 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.) b. Value of equity References eBook &Resources;

Explanation / Answer

Firm Value/Asset = Equity Value + Debt Value

Currently value of Asset is $1,130, Value of Debt $1000 in one year

Present Value of Debt discounted as risk free rate 3% (T-Bills) = 1000/1.03 = $971

Value of Equity = 1,130 - 971 = $159

Value of Debt = $971

If the value of asset is $1640 one year from now, then the value of equity will be 1640 - 1000 = 640.

The present value of equity is 640/1.03 = 621.36

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