Company BSM has total assets with a market value of $100 million financed by debt and equity. The annual volatility (standard deviation) of the total asset return is 30%. The debt is newly issued zero-coupon debt with a face-value of $60 million due for payment in one year. BSM’s assets have zero systematic risk. The risk free interest rate is 5% per annum with continuous compounding. Assume: there are no taxes; BSM will pay no dividends; the future value of BSM’s assets is log-normally distributed; the assets trade in a complete market; and lenders do not anticipate any change in management strategy . What is the market value of BSM’s debt? a. $43.2 million b. $45.4 million c. $56.8 million d. $57.1 million e. $59.7 million

Company BSM has total assets with a market value of $100 million financed by debt and equity. The annual volatility (standard deviation) of the total asset return is 30%. The debt is newly issued zero-coupon debt with a face-value of $60 million due for payment in one year. BSM’s assets have zero systematic risk. The risk free interest rate is 5% per annum with continuous compounding. Assume: there are no taxes; BSM will pay no dividends; the future value of BSM’s assets is log-normally distributed; the assets trade in a complete market; and lenders do not anticipate any change in management strategy . What is the market value of BSM’s debt? a. $43.2 million b. $45.4 million c. $56.8 million d. $57.1 million e. $59.7 million

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 16P

See similar textbooks

Similar questions

Merit Inc. has zero coupon debt outstanding that will have to be repaid in three years, with a face value of $80.00 million. The risk-free interest rate is 4.19% per annum (continuously compounded). You estimate that the firm's asset volatility is 17.39% per annum and that its assets are currently worth $102.00 million. It doesn't pay dividends. Use Merton's model to estimate the value of Merit's equity. Write your answer in million of dollars.
Company BSM has total assets with a market value of $100 million financed by debt and equity. The annual volatility (standard deviation) of the total asset return is 30%. The debt is newly issued zero-coupon debt with a face-value of $60 million due for payment in one year. BSM’s assets have zero systematic risk. The risk free interest rate is 5% per annum with continuous compounding. Assume: there are no taxes; BSM will pay no dividends; the future value of BSM’s assets is log-normally distributed; the assets trade in a complete market; and lenders do not anticipate any change in management strategy . If BSM's management (unexpectedly) switch to a new strategy that doubles the total asset return volatility (without impacting total asset value or triggering any debt covenants), which of the following statements is/are true? a. The market value of BSM's equity will go up b. The market value of BSM's equity will go down c. The market value of BSM's debt will go…
Company BSM has total assets with a market value of $100 million financed by debt and equity. The annual volatility (standard deviation) of the total asset return is 30%. The debt is newly issued zero-coupon debt with a face-value of $60 million due for payment in one year. BSM’s assets have zero systematic risk. The risk free interest rate is 5% per annum with continuous compounding. Assume: there are no taxes; BSM will pay no dividends; the future value of BSM’s assets is log-normally distributed; the assets trade in a complete market; and lenders do not anticipate any change in management strategy . What discrete interest rate will BSM’s debt yield if it doesn’t go bankrupt? a. 5.00% b. 5.13% c. 5.37% d. 5.48% e. 5.63%
Suppose the Schoof Company has this book value balance sheet: The notes payable are to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the companys permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of 1,000, an annual coupon interest rate of 6%, and a 20-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of 60 per share. Calculate the firms market value capital structure.
Wolfrum Technology (WT) has no debt. Its assets will be worth $467 million one year from now if the economy is strong, but only $295 million in one year if the economy is weak. Both events are equally likely. The market value today of its assets is $291 million. a. What is the expected return of WT stock without leverage? b. Suppose the risk-free interest rate is 5%. If WT borrows $139 million today at this rate and uses the proceeds to pay an immediate cash dividend, what will be the market value of its equity just after the dividend is paid, according to MM? c. What is the expected return of WT stock after the dividend is paid in part (b)? a. The unievered expected return of WT stock is (Round to two decimal places)
Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $20 million. Assume the firm has no default risk and can borrow at the risk-free interest rate. The risk-free interest rate is 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost of capital for an otherwise identical all-equity firm? O 7.77% O 9.00% O 10.14% O 8.27%
9(b) You may assume the Merton model for credit risk holds true for this question. A companyhas fixed debt of £45 million with term two years, the current value of the company’sassets is £52 million. The risk-free rate of return is 4.5% per annum continuouslycompounded, the assets of the company follow geometric Brownian motion with volatility25% per annum and there are no other dividends or interest payments. Calculate the riskneutral probability of default.
A firm's assets are currently valued at $700.9 million, its current liabilities are $ 120 million, and long-term -liabilities are $300 million . the standard deviation of expected asset value $76 million . assume the firm has no other debt and that the ratio of long-term -liabilities -to-short- term -liabilities is less than 1.5, what will be the appropriate distance to default measure when utilizing Moody's KMV credit Monitor * ? model standard deviations 5.66 standard deviations 9.21 standard deviations 3.68 standard deviations 1.87
Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $10million. Assume the firm has no default risk and can borrow at the risk-free interest rate. Therisk-free interest rate is 5 percent per year, and the expected return on the market portfolio is11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost ofcapital for an otherwise identical all-equity firm? handwrite please
The total market value of the equity of Okefenokee Condos is $8 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 0.5 and that the expected risk premium on the market is 12%. The Treasury bill rate is 3%, and investors believe that Okefenokee's debt is essentially free of default risk. a. Estimate the WACC assuming a tax rate of 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Estimate the discount rate for an expansion of the company’s present business. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.0. What is the required rate of return on Okefenokee’s new venture? (You should assume that the risky project will not enable the firm to issue any…
Help me please
Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt?