# Question

The J. Miles Corp. has 25 million shares outstanding with a share price of $20 per share. Miles also has outstanding zero-coupon debt with a 5-year maturity, a face value of $900 million, and a yield to maturity of 9%. The risk-free interest rate is 5%.

a. What is the implied volatility of Miles’ assets?

b. What is the minimum profitability index required for equity holders to gain by funding a new investment that does not change the volatility of the Miles’ assets?

c. Suppose Miles is considering investing cash on hand in a new investment that will increase the volatility of its assets by 10%. What is the minimum NPV such that this investment will increase the value of Miles’ shares?

a. What is the implied volatility of Miles’ assets?

b. What is the minimum profitability index required for equity holders to gain by funding a new investment that does not change the volatility of the Miles’ assets?

c. Suppose Miles is considering investing cash on hand in a new investment that will increase the volatility of its assets by 10%. What is the minimum NPV such that this investment will increase the value of Miles’ shares?

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