A company's assets will have a value, one year from now, equal to $45 millions if economic conditions are good or to $8 millions if the conditions are bad, the two scenarios are equally likely. The company currently has no debt and, after one year, it will terminate its operations. Today (1yr before termination of operations), the company has decided to go through with a recapitalization issuing a zero coupon bond with face value of $10 millions and 1 yr maturity and buying back its own shares with the proceeds. The expected return required by bondholders is 5.45%. In case of bankruptcy there will be estimated direct costs of bankruptcy for $564,000 and indirect costs of bankruptcy for $789,000. The return on levered equity after the recapitalization will be 15%. At the moment (before the recapitalization) the company has 100,000 shares outstanding. Assume no taxation.

A) What is the value of levered equity?

B) What is the amount of money raised from bondholders when the bond is issued?

C) How many shares will be bought back?

Answer rating: 100% (QA)

The obtained result is provided below B 1 Economic conditions ... View the full answer