Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in

Question:

Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of the company’s assets is currently $1,040. Urban Meyer, the CEO, believes that the assets in the company will be worth either $940 or $1,270 in a year. The going rate on one-year T-bills is 4.8 percent.

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

b. Suppose the company can reconfigure its existing assets in such a way that the value in a year will be $850 or $1,750. If the current value of the assets is unchanged, will the stockholders favor such a move? Why or why not?

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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