Consider a firm with assets currently worth $400m. The assets' worth could increase to $520m with...

 

Transcribed Image Text:

Consider a firm with assets currently worth $400m. The assets' worth could increase to $520m with probability 20% or decrease to $320m with probability 80% in one year's time. The firm has a debt with face value of $380m maturing at that time. The risk-free rate is equal to 10% per year. i. What are the firm's debt and equity currently worth? ii. (6 marks) How would your answers to part i. change if the firm committed to pay a dividend equal to $20m shortly before the debt was maturing? Consider a firm with assets currently worth $400m. The assets' worth could increase to $520m with probability 20% or decrease to $320m with probability 80% in one year's time. The firm has a debt with face value of $380m maturing at that time. The risk-free rate is equal to 10% per year. i. What are the firm's debt and equity currently worth? ii. (6 marks) How would your answers to part i. change if the firm committed to pay a dividend equal to $20m shortly before the debt was maturing?

Answer rating: 100% (QA)

Valuation of the Firm and Impact of Dividend i Current Debt and Equity Value Approach Calculate the ... View the full answer