Company I-fall's market capitalization is currently $50million. Its debt is $90 million. All their debts are due
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Question:
Company I-fall's market capitalization is currently $50million. Its debt is $90 million. All their debts are | |||||
due in one year. Asset volatility is 40% while expected return on asset is 14.71%. | |||||
a) According to the Merton model, what is I-fall's actual default probability? | |||||
b) If the riskfree rate is 4.76% p.a., at what rate should lenders charge I-fall on their borrowings? | |||||
Assuming LGD = 0.5. | |||||
c) If the company takes on extra debt, by issuing a par bond, face value $10 million, after the bond | |||||
issuance, the interest rate lenders charge I-fall would increase by how much? | |||||
Assume the current debt is $90 million again. | |||||
d) If the asset volatility reduces from 40% to 30%, what is the maximum amount of debt, in par | |||||
bonds, the company can issue such that the interest rate they pay after the bond issuance is lower than | |||||
or equal to the rate they pay in part b). Enter your answer in millions of dollars, and include at least | |||||
three decimal places. | |||||
Assume the current debt is $90 million and the volatility is 40% again. | |||||
e) If LGD decreases from 0.5 to 0.4, what would be the maximum amount of debt, in par bonds, | |||||
the company can issue such that the interest rate they pay after the bond issuance is lower than or | |||||
equal to the interest rate they pay in part b). Enter your answer in millions of dollars, and include | |||||
at least three decimal places. |
Related Book For
Intermediate Accounting
ISBN: 978-1118742976
16th edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
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