Question

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.)**

Answer #1

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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