Question

# Rackin Pinion Corporation’s assets are currently worth \$1,080. In one year, they will be worth either...

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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