How to compute the price of loan in two cases

Assignment Help Finance Basics
Reference no: EM13336076

Consider a firm that can invest $250 right now, at t=0 in a project that will yield a single cash flow one period hence, at t=1. This $250 investment will be raised by issuing unsecured debt at t=0. This project will yield $500 with probability 0.8 and nothing with probability 0.2 at t=1. Immediately after the initial investment but before the end of the period (say t=1/2), the firm can purchase another asset, call it asset A, for $250 also. If purchased, A will yield a sure payoff of $300 at t=1. Those who lend the firm money at t=0 cannot observe at t=1/2 whether the firm had this investment opportunity. Everybody is risk neutral and the riskless rate is 12%. If you are the banker the firm has approached for a $250 loan at t=0, compute the price of your loan in two cases: (i) the firm can finance the acquisition of asset A with unsecured debt or not at all, and (ii) the firm can fiancé the acquisition of asset A with debt secured by the asset in question. Assume that in case (i), your bank (the initial lender) will have the same seniority as the new (unsecured) creditors who supply funds to purchase A. Your bank is competitive in loan pricing.

Reference no: EM13336076

Determine the market value of the operation

Determine the market value of the operation ignoring taxes. Assume that all cash flows occur at the end of each year. (Hint: Chart all possible sequences of oil prices, and

What is qm weighted average cost of capital

If the cost of common equity for the firm is 18.2%, the cost of preferred stock is 10.9% , the before tax cost of debt is 7.6% and the firm's tax rate is 35% what is QM's we

Calculate npv and irr of proposed investment

The plane falls into the MACRS depreciation class for seven-year assets. GSHAI's combined federal and state income tax rate is 35 percent, and the company's weighted average

Determine the total two-year interest cost

Boatler Used Cadillac Corporation needs $80,000 in financing over the next 2-years. The company can borrow  funds for 2-years at 9% interest every year.

Make a break-even chart using total cost versus volume

Peter, a president of a company produces power transformers for personal computer manufacturers. Peter's choice of the various methods by which a new model of transformer can

What checks are there on the accuracy of these statements

Who reads financial statements? List at least three different categories of people. For each category, provide an example of the type of information they might be interested i

Calculate the present value of each scenario or outcome

Calculate the present value of each scenario or outcome for Black Hawk Products. Calculate the weighted average of the present values for the three scenarios. What is the tota

Compute firms retained earnings balance

A company had a year end 2004 retained earnings balance of $220,000. The company reported net profits after taxes of $50,000 in 2005 & paid dividends in 2005 of $30,000.


Write a Review

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd