Question: Equity as an option Buckeye industries has a bond issue with a face value of $1,000 that is coming due in one year. The value

Equity as an option Buckeye industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of Buckeye’s assets is currently $1,200. Jim Tressell, the CEO, believes that the assets in the firm will be worth either $900 or $1.500 in a year. The going rate on one-year T-bills is 7 percent.

a. What is the value of Buckeye’s equity the value of the debt?

b. Suppose Buckeye can reconfigure its existing assets iii such a way that the value in a year will be $700 or $1,700. If the current value of the assets is unchanged, will the stockholders favor such a move? Why or why not?

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