Estimate the value of the firm

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XYZ Corporation has $500 million in zero-coupon debt outstanding, due in five years. The firm had earnings before interest and taxes of $40 million in the most recent year (the tax rate is 40%). These earnings are expected to grow 5% a year in perpetuity, and the firm paid no dividends. The firm had a cost of equity of 12% and a cost of capital of 10%. The annualized standard deviation in firm values of comparable firms is 12.5%. The five-year bond rate is 5%.

A. Estimate the value of the firm.

B. Estimate the value of equity, using an option pricing model.

C. Estimate the market value.

Reference no: EM131540830

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