Question

3. Acort Industries owns assets that will have​ a(n) 75% probability of having a market value of $51 million in one year. There is a 25% chance that the assets will be worth only $21

million. The current​ risk-free rate is 4%​, and​ Acort's assets have a cost of capital of 8%.

a. If Acort is​ unlevered, what is the current market value of its​ equity?

b. Suppose instead that Acort has debt with a face value of $19 million due in one year. According to​ MM, what is the value of​ Acort's equity in this​ case?

c. What is the expected return of​ Acort's equity without​ leverage? What is the expected return of​ Acort's equity with​ leverage?

d. What is the lowest possible realized return of​ Acort's equity with and without​ leverage?

Answer 1

Answer:

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