. You have collected information about firm XYZ as follows: The debt of the firm:...

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. ▪ You have collected information about firm XYZ as follows: The debt of the firm: par value = $250, annual coupon = $40 (paid once a year), maturity 2 years. The total value of the firm (including equity and the debt) = $400 now. The firm's future values follow a two-state path with UP state growth multiple u 1.35 and DOWN state growth multiple d = 0.7407 each year. ▪ The annual risk-free rate = 2%. ▪ Assume annual compounding and coupon payments (a) What is the value of the firm's debt, if it is a straight corporate debt? (10 points) (b) Suppose now that instead of a straight corporate debt as in (1), the firm's debt is convertible for 40% of the firm's value. What is the value of the convertible corporate debt? (10 points) (c) There is a Treasury bond with the par value of $250, annual coupon of $40, and the maturity of 2 years. Suppose that the term structure of spot rates is flat at 2%. What is the value of the Treasury bond? (6 points) (d) Calculate the credit spread, which is the difference in yield between the straight corporate bond and the Treasury bond. (4 points) . ▪ You have collected information about firm XYZ as follows: The debt of the firm: par value = $250, annual coupon = $40 (paid once a year), maturity 2 years. The total value of the firm (including equity and the debt) = $400 now. The firm's future values follow a two-state path with UP state growth multiple u 1.35 and DOWN state growth multiple d = 0.7407 each year. ▪ The annual risk-free rate = 2%. ▪ Assume annual compounding and coupon payments (a) What is the value of the firm's debt, if it is a straight corporate debt? (10 points) (b) Suppose now that instead of a straight corporate debt as in (1), the firm's debt is convertible for 40% of the firm's value. What is the value of the convertible corporate debt? (10 points) (c) There is a Treasury bond with the par value of $250, annual coupon of $40, and the maturity of 2 years. Suppose that the term structure of spot rates is flat at 2%. What is the value of the Treasury bond? (6 points) (d) Calculate the credit spread, which is the difference in yield between the straight corporate bond and the Treasury bond. (4 points)

Answer rating: 100% (QA)

a The value of the firms debt as a straight corporate debt can be calculated using the formula for the present value of a bond PV C 1 r1 C 1 r2 F 1 r2 where PV is the present value of the debt C is th... View the full answer