Question: Problem 1 (12 points) Hema Corp. is an all equity firm with a current market value of $1000 million, and will be worth 5900 million

Problem 1 (12 points) Hema Corp. is an all equity firm

Problem 1 (12 points) Hema Corp. is an all equity firm with a current market value of $1000 million, and will be worth 5900 million or $1400 million in one year. The risk-free interest rate is 5%. Suppose Hema Corp. issues zero-coupon, one year debt with a face value of S1050 million, and uses the proceeds to pay a special dividend to shareholders Assume perfect capital markets. a. What is the yield on the debt today? b. What is the value of equity just after the dividend is paid? c. Suppose that in the event Hema Corp, defaults, 590 million of its value will be lost to bankruptcy costs Assume there are no other market imperfections. What is the yield of Hema's debt today? What is the value of equity just after the dividend is paid

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