Construction firm financed by both debt and equity

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Reference no: EM13919360

Strudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $380 million, but if the project is a failure, the firm will be worth only $240 million. The current value of Strudler is $280 million, a figure that includes the prospects for the new project. Strudler has outstanding zero coupon bonds due in one year with a face value of $310 million. Treasury bills that mature in one year yield a 7 percent EAR. Strudler pays no dividends. a. Use the two-state option pricing model to calculate the current value of Strudler’s debt and equity. (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Debt $ Equity $ b. Suppose Strudler has 950,000 shares of common stock outstanding. What is the price per share of the firm’s equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Price per share $ c. Suppose that in place of the preceding project, Strudler’s management decides to undertake a project that is even more risky. The value of the firm will either increase to $415 million or decrease to $225 million by the end of the year. Surprisingly, management concludes that the value of the firm today will remain at exactly $280 million if this risky project is substituted for the less risky one. Use the two-state option pricing model to determine the values of the firm’s debt and equity if the firm plans on undertaking this new project. (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) Value of Debt $ Value of Equity $ d. Which project do bondholders prefer? Riskier project Conservative project

Reference no: EM13919360

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Construction firm financed by both debt and equity : Strudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $380 million, but if the project is a failure, the firm will be wo..

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