Techpikker AG is a manufacturer of high-tech toothpicks, located in Wuppertal, Germany. Suppose that investors are unsure about the future prospects of Techpikker. They believe that the firm may have good prospects, in which case the value of the firm (debt and equity) would be given by: €(220 + X) billion. Alternatively, the firm's future could be not so good, in which case the firm value would be €40 billion (less than 220+X). Investors do not know the value of X, but they believe that the CEO does. Everyone knows that the probability of the two outcomes (good prospects and bad prospects, respectively) is 50%. 

You may assume that everyone is risk neutral, and that interest rates are zero (everyone's discount rate is zero). State any additional assumptions, if you believe you need to make any. 

a. The firm has senior debt outstanding with face value of €30 billion. 

 What is the value of the firm for outside investors? 

What is the market value of equity and the market value of debt? 

Do the value of equity and debt depend on X? How? 

Answer rating: 100% (QA)

The value of the firm for outside investors can be calculated as the weighted average o... View the full answer