Question: Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures in one year. The current market value of the
Sunburn Sunscreen has a zero coupon bond issue outstanding with a $25,000 face value that matures in one year. The current market value of the firms assets is $26,100. The standard deviation of the return on the firms assets is 34 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $2,600, and Project B has an NPV of $3,500. As the result of taking Project A, the standard deviation of the return on the firms assets will increase to 54 percent per year. If Project B is taken, the standard deviation will fall to 36 percent per year. What is the value of the firms equity and debt if Project A is undertaken? What is the value of the firms equity and debt if Project B is undertaken?
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