Before a recapitalization, an all equity (no debt company) firm has 600 shares trading at 2.5€. It decides to recapitalize by issuing debt in the form of a zero-coupon with a maturity of 4 years and a principal of 900€. The price of a call option traded on one share of the company is c=1.5€ for maturity 4 years and strike price 1.5€. The risk-free rate is r=1.1% for 4 years maturity. Markets are assumed to be perfect.

1) What is the value of the firm (value of the total assets)? 

2) What is the value of the equity after the recapitalization, explain your answer

3) What is the value of the debt of the firm after recapitalization? 

4) What is the leverage value before and after recapitalization?

5) What is the value of the yield to maturity for a maturity of four years?

6) What is the value of the spread after recapitalization? 

Answer rating: 100% (QA)

Question 1 The value of the firm also known as the value of the total assets can be calculated using ... View the full answer