Question

Nextdoor Corp. is in an uncertain business environment. Its assets will have a market value of...

Nextdoor Corp. is in an uncertain business environment. Its assets will have a market value of either $5 million (with a probability of 60%) or $7.5 million (with a probability of 40%) in one year. The risk-free rate is 2% and the company's current cost of capital is 12%. Assume perfect capital markets. The company now borrows 70% of its current value at the risk-free rate and uses the money to repurchase shares. What is the approximate value of equity now (in $ million)?

a) $1.6

b) $2.0

c) $2.4

d) $2.2

f) $1.8

e) Other, specify

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Answer #1

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