Sunburn Sunscreen has a zero coupon bond issue outstanding with a $20,000 face value that matures in one year. The current market value of the firmâs assets is $22,300. The standard deviation of the return on the firmâs assets is 42 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously.
Based on the BlackâScholes model, what is the market value of the firmâs equity and debt? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Market value Equity $ Debt $
| Sunburn Sunscreen has a zero coupon bond issue outstanding with a $20,000 face value that matures in one year. The current market value of the firmâs assets is $22,300. The standard deviation of the return on the firmâs assets is 42 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. |
| Based on the BlackâScholes model, what is the market value of the firmâs equity and debt? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) |
| Market value | |
| Equity | $ |
| Debt | $ |
Related questions
| Sunburn Sunscreen has a zero coupon bond issue outstanding with a $26,000 face value that matures in one year. The current market value of the firm's assets is $27,600. The standard deviation of the return on the firm's assets is 40 percent per year. |
| Frostbite Thermalwear has a zero coupon bond issue outstanding with a face value of $36,000 that matures in one year. The current market value of the firm's assets is $40,400. The standard deviation of the return on the firm's assets is 46 percent per year. |
| Suppose Sunburn Sunscreen and Frostbite Thermalwear have decided to merge. Because the two companies have seasonal sales, the combined firmâs return on assets will have a standard deviation of 21 percent per year, and the annual risk-free rate is 6 percent per year, compounded continuously. |
| a-1 | What is the combined value of equity in the two existing companies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Equity | $ |
| a-2 | What is the combined value of debt in the two existing companies? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Debt | $ |
| b-1 | What is the value of the new firmâs equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Equity | $ |
| b-2 | What is the value of the new firmâs debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Debt | $ |
| c-1 | What was the gain or loss for shareholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Gain/Loss | $ |
| c-2 | What was the gain or loss for bondholders? (A loss should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Gain/Loss |
| A company has a single zero coupon bond outstanding that matures in five years with a face value of $29 million. The current value of the companyâs assets is $22 million, and the standard deviation of the return on the firmâs assets is 45 percent per year. The risk-free rate is 3 percent per year, compounded continuously. |
| a. | What is the current market value of the companyâs equity? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Current market value | $ |
| b. | What is the current market value of the companyâs debt? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Current market value | $ |
| c. | What is the companyâs continuously compounded cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| Cost of debt | % |
| d. | The company has a new project available. The project has an NPV of $1,800,000. If the company undertakes the project, what will be the new market value of equity? Assume volatility is unchanged. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) |
| Market value of equity | $ |
| e. | Assuming the company undertakes the new project and does not borrow any additional funds, what is the new continuously compounded cost of debt? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| Cost of debt |
