User Account

All Pages

What are the values of the debt and equity

Assignment Help Accounting Basics
Reference no: EM133028709

Question - Assume the assets of a firm will be worth either $100 million or $200 million in 1 year with equal (50%) probability. The firm owes debt holders a payment of $100 million in 1 year. (For convenience assume a discount rate of 0% throughout for all valuations. Absolute priority rules hold, i.e., the debt gets paid first. Hint: Think DCF!)

a. What is the value of the firm today?

b. What are the values of the debt and equity today?

c. Imagine the firm pays stockholders a dividend of $10 million in 1 year (in both states of the world), just before the debt comes due. This dividend payment reduces the value of the assets in 1 year to $90 million and $190 million in the two states. What are the values of the debt and equity today, where the dividend should be included in the equity value?

d. Instead of paying a dividend the firm decides to increase risk, without changing expected asset value. Specifically, the assets will be worth either $80 million or $220 million in the two states. What are the values of the debt and equity?

Reference no: EM133028709

Questions Cloud

Discuss recent trends in compensation practices : Discuss recent trends in compensation practices taking place in North America and explain what may be causing those trends.
Calculate the debt-to-assets ratio : Suppose half of its liabilities are in the form of debt. Calculate the debt-to-assets ratio
Understanding the real business issue : Real business issue and how you can make the best contribution to your manager. What kinds of data or information would make a contribution to this issue?
Develop sustainable processes and strategies for business : -Explain how Porter's Competitive Forces Model can help develop sustainable processes and strategies for business by applying it to Management Information Syste
What are the values of the debt and equity : Specifically, the assets will be worth either $80 million or $220 million in the two states. What are the values of the debt and equity
What would be reported for ending merchandise inventory : What would be reported for Ending Merchandise Inventory on the balance sheet at December? 31, 2024
Should there be limits placed on the types of weapons : Research that limits the types of weapons a police officer can use on a child. 1. Should there be limits placed on the types of weapons a police officer may use
Discuss how the cost-benefit analysis depicted : Discuss how the cost-benefit analysis depicted in the statement did or did not affect decisions made by Congress to maintain or modify the Medicare programs
Prepare the adjusting journal entries : In relation to the above intragroup transactions: Prepare adjusting journal entries for the consolidation worksheet at 30 June 2023

Reviews

Write a Review

Accounting Basics Questions & Answers

  How much control does fed have over this longer real rate

Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have over this longer real rate?

  Coures:- fundamental accounting principles

Coures:- Fundamental Accounting Principles: - Explain the goals and uses of special journals.

  Accounting problems

Accounting problems,  Draw a detailed timeline incorporating the dividends, calculate    the exact Payback Period  b)   the discounted Payback Period. the IRR,  the NPV, the Profitability Index.

  Theory of interest - term structure of interest rates

Term Structure of Interest Rates

  Write a report on internal controls

Write a report on Internal Controls

  Prepare the bank reconciliation for company

Prepare the bank reconciliation for company.

  Cost-benefit analysis

Create a cost-benefit analysis to evaluate the project

  Theory of interest

Theory of Interest: NPV, IRR, Nominal and Real, Amortization, Sinking Fund, TWRR, DWRR

  Liquidity and profitability

Distinguish between liquidity and profitability.

  What is the expected risk premium on the portfolio

Your Corp, Inc. has a corporate tax rate of 35%. Please calculate their after tax cost of debt expressed as a percentage. Your Corp, Inc. has several outstanding bond issues all of which require semiannual interest payments.

  Simple interest and compound interest

Simple Interest, Compound interest, discount rate, force of interest, AV, PV

  Capm and venture capital

CAPM and Venture Capital

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd