Firm D has a firm value of $1.1 billion and outstanding zero coupon debt (without interest payments)

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Firm D has a firm value of $1.1 billion and outstanding zero coupon debt (without interest payments) with a 10-year maturity and a face value of $750 million. The volatility (that is, the annual standard deviation) of Firm D’s assets (or firm value) is 40%. The risk-free rate is 1%.

(a) What is the yield to maturity for Firm D’s debt?

(b) Suppose an investment in a project does not change the volatility (that is, the annual standard deviation) of Firm D’s assets (or the annual standard deviation of firm value). The investment costs $50 million. What is the minimum NPV of the project (for the firm) that would allow Firm D to finance it by issuing new equity? Show your calculations

Posted Date: Sep 12, 2021 08:27 AM

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Firm D has a firm value of $1.1 billion and outstanding zero coupon debt (without interest payments)

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