Reference no: EM13895376
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 $320 million, but if the project is a failure, the firm will be worth only $210 million. The current value of Strudler is $250 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 $280 million. Treasury bills that mature in one year yield a 9 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))
B. Suppose Strudler has 550,000 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))
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 $355 million or decrease to $195 million by the end of the year. Surprisingly, management concludes that the value of the firm today will remain at exactly $250 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))
D. Which project (Riskier project or Conservative project) do bondholders prefer?
Use annualized net present value approach to evaluate
: Portland Products is considering the purchase of one of three mutually exclusive projects for increasing production efficiency. The firm plans to use a 14% cost of capital to evaluate these equal-risk projects. Calculate the NPV for each project over..
|
Range of annual cash inflows for each of two projects
: Murdock Paints is in the process of evaluating two mutually exclusive additions to its processing capacity. The firm’s financial analysts have developed pessimistic, most likely, and optimistic estimates of the annual cash inflows associated with eac..
|
Based on quantitative evaluation methods
: Should we base our decisions on which opportunities to pursue solely based on quantitative evaluation methods like NPV, IRR, MIRR, Payback, Real Options and others? Support your view.
|
Per value bond outstanding with a coupon rate
: Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.9 percent paid semiannually and 23 years to maturity. The yield to maturity on this bond is 4.3 percent. What is the price of the bond? (Do not round intermediate calculati..
|
Riskier project or conservative project do bondholder prefer
: 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 $320 million, but if the project is a failure, the firm will be wo..
|
What is the new continuously compounded yield on the debt
: McLemore Industries has a zero coupon bond issue that matures in two years with a face value of $39,000. The current value of the company’s assets is $22,200, and the standard deviation of the return on assets is 50 percent per year. What is the new ..
|
Chicken-plucking machine economically worthless
: High electricity costs have made Farmer Corporation’s chicken-plucking machine economically worthless. Only two machines are available to replace it. The International Plucking Machine (IPM) model is available only on a lease basis. How much debt is ..
|
Using the graphical method and shading the feasible region
: Best Products produces two popular grades of commercial carpeting among its many other products. In the coming production period, you need to decide how many rolls of each grade should be produced in order to maximize profit. Solve the problem using ..
|
Are the rights underpriced or overpriced
: Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take three rights to buy a new share in the offering at a subscription price of $39. What price should the stock sell for ex-rights? Are the rights un..
|