Question

Rackin Pinion Corporation’s assets are currently worth $1,170. In one year, they will be worth either...

Rackin Pinion Corporation’s assets are currently worth $1,170. In one year, they will be worth either $1,130 or $1,420. The risk-free interest rate is 5 percent. Suppose the company has an outstanding debt issue with a face value of $1,000.
a. What is the value of the equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)


    

b-1. What is the value of the debt?
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Given

Assets = $1,170

In one year it will be either $1,130 or $1,420

Risk free rate r= 5%

Face value of debt = $1000

From the above we can see that one year later the value is minimum of $1,130 which is greater than the face value of debt = $1,000

So, the risk free rate = interest rate of debt

a.

Value of equity = Assets - [ Face value of debt/ (1+ r)]

= $1170 - [ $1000/ (1+ 0.05)]

= $1170 – 952.3809524 = $217.6190476

Value of equity = $217.62

b-1.

Value of debt = Assets - Value of equity = $1170 - $217.6190476 = 952.3809524

Value of debt = $952.38

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Rackin Pinion Corporation’s assets are currently worth $1,065. In one year, they will be worth either...
Rackin Pinion Corporation’s assets are currently worth $1,065. In one year, they will be worth either $1,000 or $1,340. The risk-free interest rate is 3.9 percent. Suppose the company has an outstanding debt issue with a face value of $1,000. a. What is the value of the equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b-1. What is the value of the debt? (Do not round intermediate calculations and round your answer...
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...
Buckeye Industries has a bond issue with a face value of $1,000 that is coming due...
Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye’s assets is currently $1,200. Urban Meyer, the CEO, believes that the assets in the firm will be worth either $950 or $1,470 in a year. The going rate on one-year T-bills is 2 percent.    a-1 What is the value of the company’s equity? (Do not round intermediate calculations and round your answer to 2 decimal places,...
Buckeye Industries has a bond issue with a face value of $1,000 that is coming due...
Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye’s assets is currently $1,100. Urban Meyer, the CEO, believes that the assets in the firm will be worth either $930 or $1,390 in a year. The going rate on one-year T-bills is 2 percent.    a-1 What is the value of the company’s equity? (Do not round intermediate calculations and round your answer to 2 decimal places,...
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $35,000 that...
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $35,000 that matures in one year. The current market value of the firm’s assets is $40,300. The standard deviation of the return on the firm’s assets is 47 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. a. Based on the Black–Scholes model, what is the market value of the firm’s equity and debt? (Do not round intermediate calculations and...
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $38,000 that...
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $38,000 that matures in one year. The current market value of the firm’s assets is $41,400. The standard deviation of the return on the firm’s assets is 42 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. a. Based on the Black-Scholes model, what is the market value of the firm's equity and debt? (Do not round intermediate calculations and...
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures...
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures in one year. The current market value of the firm’s assets is $27,200. The standard deviation of the return on the firm’s assets is 35 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. Based on the Black–Scholes model, what is the market value of the firm’s equity and debt? (Do not round intermediate calculations and round your...
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $46,000 that...
Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $46,000 that matures in one year. The current market value of the firm’s assets is $49,600. The standard deviation of the return on the firm’s assets is 36 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. a. Based on the Black–Scholes model, what is the market value of the firm's equity and debt? (Do not round intermediate calculations and...
A stock is currently priced at $57. The stock will either increase or decrease by 10...
A stock is currently priced at $57. The stock will either increase or decrease by 10 percent over the next year. There is a call option on the stock with a strike price of $55 and one year until expiration. If the risk-free rate is 2 percent, what is the risk-neutral value of the call option? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))   Call value $   
Jiminy's Cricket Farm issued a 30-year, 6.3 percent semiannual bond 7 years ago. The bond currently...
Jiminy's Cricket Farm issued a 30-year, 6.3 percent semiannual bond 7 years ago. The bond currently sells for 107.8 percent of its face value. The book value of this debt issue is $149 million. In addition, the company has a second debt issue, a zero coupon bond with 11 years left to maturity; the book value of this issue is $93 million, and it sells for 62.2 percent of par. The company’s tax rate is 24 percent. 1. What is...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT