4) A firm's value (debt plus equity) is currently worth $240. One year from now, it will be worth either $400 or $80. It has issued a one-year, zero-coupon bond with maturity value = $100. The current risk-free rate is 0%. 

 

4A) What is the credit spread on the debt? 

 

4B) What is the value of the equity? 

 

4C) What is the present value of equity's limited liability in this problem? That is, how much more valuable is the equity claim because it can default rather than pay debtholders what was promised to them?

Answer rating: 100% (QA)

Heres how to solve the problem 4A Credit Spread The credit spread represents the additional yield a corporate bond offers compared to a riskfree bond ... View the full answer