What is the value of the firms equity and debt

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Reference no: EM13917683

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $12,000 face value that matures in one year. The current market value of the firm’s assets is $13,800. The standard deviation of the return on the firm’s assets is 34 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $1,500, and Project B has an NPV of $2,300. As the result of taking Project A, the standard deviation of the return on the firm’s assets will increase to 49 percent per year. If Project B is taken, the standard deviation will fall to 21 percent per year.

a-1: What is the value of the firm’s equity and debt if Project A is undertaken?

a-2: What is the value of the firm’s equity and debt if Project B is undertaken?

b: Which project would the stockholders prefer?

c: Suppose the stockholders and bondholders are in fact the same group of investors. Would this affect your answer to (b)?

Reference no: EM13917683

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