Rackin Pinion Corporation’s assets are currently worth $1,080. In one year, they will be worth either $1,040 or $1,330. The risk-free interest rate is 3 percent. Suppose the company has an outstanding debt issue with a face value of $1,000.
What is the value of the equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the value of the debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
What is the interest rate on the debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to the nearest whole number, e.g., 32.)
A.
Value of equity = value of assets – present value of debt
Value of assets = 1160
Present value of debt = Face value of debt / risk free rate
= 1000/1.03 = 970.87
Value of equity = 1160 – 970.87 = 189.13
B.
Present value of debt = Face value of debt / risk free rate
= 1000/1.03 = 970.87
C.
Interest rate = 3%
Since the debt is risk free as asset worth of 1120 is greater than 1000 $ of debt.
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