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Sunburn Sunscreen has a zero coupon bond issue outstanding with a $20,000 face value that matures in one year. The current market value of the firm’s assets is $23,200. The standard deviation of the return on the firm’s assets is 27 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $45,000 that matures in one year. The current market value of the firm’s assets is $48,600. The standard deviation of the return on the firm’s assets is 35 percent per year. Suppose Sunburn Sunscreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firm’s return on assets will have a standard deviation of 18 percent per year.
a. What is the combined value of equity in the two existing companies?
a 2. What is the combined value of debt in the two existing companies?
b. What is the value of the new firm’s equity?
b 2. What is the value of the new firm’s debt?
c. What was the gain or loss for shareholders?
c 2. What was the gain or loss for bondholders?
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The effective annual yield on a one-year zero coupon bond is 7% and the effective annual interest rate on a two-year zero coupon bond is 8%. You are able to arrange a one-year forward investment at rate i for a one-year period.
Explain the parts of the business plan
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A7X Corp. just paid a dividend of $1.30 per share. The dividends are expected to grow at 16 percent for the next eight years and then level off to a growth rate of 5 percent indefinitely. If the required return is 11 percent, what is the price of the..
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