Business, 06.12.2019 22:31 beaniewastaken

Consider a firm that exists in a world with two periods (time 0 and time 1) and two equally likely states of the world at time 1. at time 0 the firm’s securities are traded. at time 1 the state is revealed. in the up-state the firm’s assets are worth $120 and in the down-state they are worth $40. the firm has debt outstanding with a face value of $60. assume that the required rate of return is zero and investors are risk neutral.

a) compute the market value of debt, equity and the total market value of the company at time 0.

b) suppose that the company issues some additional debt with a face value of $40. this debt is pari passu (equal priority) with respect to the existing debt and the proceeds are invested in a zero npv riskless project (i. e., the money is put in a safe box). how much money is the company able to raise with this debt issue?

c) how much did the value of the old debt change? why?

d) how much did the value of equity change? why?

e) instead, suppose that the company will invest in a zero npv but risky project. in particular assume that if the firm invests an additional $15 at time 0 it will receive $30 in the up-state but $0 in the down-state. suppose you want to raise the $15 to undertake this investment issuing pari passu debt. what will be the face value of the new debt?

f) how much did the value of the old debt change? why?

g) how much did the value of equity change? why?

h) suppose that you raise the $15 you need for the project with senior debt (i. e., debt senior with respect to the existing one). what should be the face value of the new debt?

i) how much did the value of the old debt change? why?

j) how much did the value of equity change? why?

Answers: 3

Show answers

Another question on Business

Business, 22.06.2019 11:10

Verizon communications, inc., provides the following footnote relating to its leasing activities in its 10-k report. the aggregate minimum rental commitments under noncancelable leases for the periods shown at december 31, 2010, are as follows: years (dollars in millions) capital leases operatingleases 2011 $97 $1,898 2012 74 1,720 2013 70 1,471 2014 54 1,255 2015 42 1,012 thereafter 81 5,277 total minimum 418 $ 12,633 rental commitments less interest and (86) executory costs present value of 332 minimum lease payments less current (75) installments long-term obligation $257 at december 31, 2010 (a) confirm that verizon capitalized its capital leases using a rate of 7.4 %. (b) compute the present value of verizon's operating leases, assuming an 7.4% discount rate and rounding the remaining lease term to 3 decimal places. (use a financial calculator or excel to compute. do not round until your final answers. round each answer to the nearest whole number.)

Answers: 2

Answer

Business, 22.06.2019 22:10

Afirm plans to begin production of a new small appliance. the manager must decide whether to purchase the motors for the appliance from a vendor at $10 each or to produce them in-house. either of two processes could be used for in-house production; process a would have an annual fixed cost of $200,000 and a variable cost of $7 per unit, and process b would have an annual fixed cost of $175,000 and a variable cost of $8 per unit. determine the range of annual volume for which each of the alternatives would be best. (round your first answer to the nearest whole number. include the indifference value itself in this answer.)

Answers: 2

Answer

Business, 23.06.2019 00:30

2. which of the following statements about interest is true? a. interest is a one-time fee that you pay for lending money. b. interest is expressed as a percentage of the amount you are borrowing. c. because interest rates tend to be small numbers, they typically don't have much effect on the price of the goods you're purchasing. d. interest is a penalty that you pay when you don't pay your bills on time.

Answers: 1

Answer

Business, 23.06.2019 02:00

Suppose that a major city’s main thoroughfare, which is also an interstate highway, will be completely closed to traffic for two years, from january 2014 to december 2015, for reconstruction at a cost of $535 million. if the construction company were to keep the highway open for traffic during construction, the highway reconstruction project would take much longer and be more expensive. suppose that construction would take four years if the highway were kept open, at a total cost of $800 million. the state department of transportation had to make its decision in 2014, one year before the start of construction (so that the first payment was one year away). so the department of transportation had the following choices: (i) close the highway during construction, at an annual cost of $267.5 million per year for two years. (ii) keep the highway open during construction, at an annual cost of $200 million per year for four years. now suppose the interest rate is 80%. calculate the present value of the costs incurred under each plan.

Answers: 3

Answer

You know the right answer?

Consider a firm that exists in a world with two periods (time 0 and time 1) and two equally likely s...

Questions