A company has a single zero coupon bond outstanding that matures in five years with a face

Question:

A company has a single zero coupon bond outstanding that matures in five years with a face value of $17.5 million. The current value of the company’s assets is $15.9 million, and the standard deviation of the return on the firm’s assets is 41 percent per year. The risk-free rate is 6 percent per year, compounded continuously.

a. What is the current market value of the company’s equity?

b. What is the current market value of the company’s debt?

c. What is the company’s continuously compounded cost of debt?

d. The company has a new project available. The project has an NPV of $2.2 million. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged.

e. Assuming the company undertakes the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt? What is happening here?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...

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