There are two firms - A and B with very similar characteristics. Both firms have the...
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There are two firms - A and B with very similar characteristics. Both firms have the current firm value of $100, and they have to repay $70 debt in 5 years. The risk-free rate is 3% per year. The only difference is firm A's asset volatility is 20% while firm B's asset volatility is 10% per year. 2 (a) Compute the equity and debt value for both firms. (i) Which firm has a higher equity value and why? (b) Compute the probability of default for both firms. (c) Compute the debt yield and credit spread for both firms. (i) Which firm has a higher credit risk and why? There are two firms - A and B with very similar characteristics. Both firms have the current firm value of $100, and they have to repay $70 debt in 5 years. The risk-free rate is 3% per year. The only difference is firm A's asset volatility is 20% while firm B's asset volatility is 10% per year. 2 (a) Compute the equity and debt value for both firms. (i) Which firm has a higher equity value and why? (b) Compute the probability of default for both firms. (c) Compute the debt yield and credit spread for both firms. (i) Which firm has a higher credit risk and why?
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Answer rating: 100% (QA)
a Firm A Equity Value 100 70 30 Debt Value 70 Firm B Equity Value 1... View the full answer
Related Book For
Microeconomics
ISBN: 978-0321866349
14th canadian Edition
Authors: Christopher T.S. Ragan, Richard G Lipsey
Posted Date:
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