Assume the following: (a) We are dealing with a world where there are no taxes. (b) The

Question:

Assume the following:
(a) We are dealing with a world where there are no taxes.
(b) The changes in the parameters affecting value are unanticipated; therefore redistribution effects are possible.
(c) Firms A and B initially have the following parameters:
(A = (B = .2................... Instantaneous standard deviation
TA = TB = 4 years............. of debt
VA = VB = $2,000............. Value of the firm, V = B + S
Rf = .06 ........................ Risk-free rate
DA = DB = $1,000 ............. of debt
What is the initial market value of debt and equity for firms A and B?
Face Value
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