# Question

Fourer Corp. has a zero coupon bond that matures in five years with a face value of $90,000. The current value of the company’s assets is $74,000, and the standard deviation of its return on assets is 50 percent per year. The risk-free rate is 6 percent per year, compounded continuously.

a. What is the value of a risk-free bond with the same face value and maturity as the current

bond?

b. What is the value of a put option on the firm’s assets with a strike price equal to the face value of the debt?

c. Using the answers from (a) and (b), what is the value of the firm’s debt? What is the continuously compounded yield on the company’s debt?

d. Assume the company can restructure its assets so that the standard deviation of its return on assets increases to 60 percent per year. What happens to the value of the debt? What is the new continuously compounded yield on the debt? Reconcile your answers in (c) and (d).

e. What happens to bondholders if the company restructures its assets? What happens to shareholders? How does this create an agency problem?

a. What is the value of a risk-free bond with the same face value and maturity as the current

bond?

b. What is the value of a put option on the firm’s assets with a strike price equal to the face value of the debt?

c. Using the answers from (a) and (b), what is the value of the firm’s debt? What is the continuously compounded yield on the company’s debt?

d. Assume the company can restructure its assets so that the standard deviation of its return on assets increases to 60 percent per year. What happens to the value of the debt? What is the new continuously compounded yield on the debt? Reconcile your answers in (c) and (d).

e. What happens to bondholders if the company restructures its assets? What happens to shareholders? How does this create an agency problem?

## Answer to relevant Questions

Strudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $170 million, but if the project is a ...The price of Tara, Inc., stock will be either $65 or $85 at the end of the year. Call options are available with one year to expiration. T-bills currently yield 3.9 percent. a. Suppose the current price of Tara stock is ...Indicate the impact of the following corporate actions on cash, using the letter I for an increase, D for a decrease, or N when no change occurs. a. A dividend is paid with funds received from a sale of debt. b. Real estate ...McConnell Corp. has a book net worth of $16,500. Long-term debt is $7,800. Net working capital, other than cash, is $1,900. Fixed assets are $20,700. How much cash does the company have? If current liabilities are $2,750, ...1. IPO Pricing The Eyetech IPO was underpriced by about 54 percent. Should Eyetech be upset at Merrill Lynch over the underpricing? 2. IPO Pricing In the previous question, would it affect your thinking to know that the ...Post your question

0