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Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $46,000 that matures in one year. The current market value of the firm’s assets is $49,600. The standard deviation of the return on the firm’s assets is 36 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously.
a. Based on the Black–Scholes model, what is the market value of the firm's equity and debt? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b. What is the firm's continuously compounded cost of debt?
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The principal is repaid at the end by newly borrowed money (the debt is rolled over).
Portfolio Beta Your investment club has only two stocks in its portfolio; $45,000 is invested in a stock with a beta of 0.7, and $80,000 is invested in a stock with a beta of 1.2.What is the portfolio's beta? What is the required rate of return on a ..
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