Intermediate coupons or other debt payments

Assignment Help Financial Management
Reference no: EM13885464

Suppose you are the manager and sole owner of a highly leveraged company. All the debt matures in 1 year (there are no intermediate coupons or other debt payments). If at that time the value of the company (VA) is greater than the face value of debt (K), you will pay off the debt. If the value of the company is less than the face value of the debt, you will declare bankruptcy and the debt holders will own the company.

a. Express your position payoff as sole shareholder as a function of the value of the assets of the company. What option do you hold?

b. Express the position payoff of the debt holders in terms of options on the value of the assets of the company. What position do creditors hold?

c. Suppose your company’s assets are worth $19 million. Your company owes debt with face value of $20 million in 1 year. The risk-free interest rate is 4%. You value your equity position at $1 million. What should be the market value of the company’s debt? What rate of interest are debt holders earning?

Reference no: EM13885464

Questions Cloud

Raise additional capital to fund its upcoming expansion : Klose Outfitters Inc. believes that its optimal capital structure consists of 70% common equity and 30% debt, and its tax rate is 40%. Klose must raise additional capital to fund its upcoming expansion.
Positive alphas if the market portfolio is not efficient : The book-to-market is the observation that firms with high book-to-market ratios have positive alphas. Portfolios with high market capitalizations will have positive alphas if the market portfolio is not efficient. Portfolios with low book-to-market ..
Companys cost of common equity if all of its equity : Javits & Sons' common stock currently trades at $22.00 a share. It is expected to pay an annual dividend of $1.25 a share at the end of the year (D1 = $1.25), and the constant growth rate is 4% a year. What is the company's cost of common equity if a..
Installs ventilation systems : Kholodny plc installs ventilation systems. At present its order book is rather thin and it has no work for the forthcoming period. It has been offered two contracts abroad, of wich it can take only one. Construct a decision tree to portray the situat..
Intermediate coupons or other debt payments : Suppose you are the manager and sole owner of a highly leveraged company. All the debt matures in 1 year (there are no intermediate coupons or other debt payments). Express your position payoff as sole shareholder as a function of the value of the as..
Taxable income under expensing and capitalization methods : Chris purchased an oil interest for $2 million. Recoverable barrels were estimated to be 500,000. During the year, 120,000 barrels were sold for $3.84 million, regular expenses (including cost recovery) were $1.24 million, and IDCs were $1 million. C..
A stock price is currently trading : A stock price is currently trading at $50. Over each of the next two 3-month periods it is expected to go up by 6% or down by 5%. The risk-free interest rate is 5% per annum with continuous compounding. Please Show Your Work. What is the value of a 6..
What is the initial margin requirement : In the previous problem, suppose you sell the stock at a price of $62. What is your return? What would your return have been had you purchased the stock without margin? What if the stock price is $46 when you sell the stock? You purchase 275 shares o..
Initial cost occurs in year : Initial Cost occurs in year 0. Annual Maintenance Cost starts in year 3 and increases $100 per year Annual Income starts in the year noted and increases at the rate G1 for 5 years, then becomes stable for 3 years and then declines at the rate G2 for ..

Reviews

Write a Review

 

Financial Management Questions & Answers

  What types generate the highest acquisition costs

What types of bank liabilities generate the highest servicing costs? What types generate the highest acquisition costs?

  What will be growth in demand for owner-occupied units

Suppose that the annual growth in real income in Japan is expected to be between 2 and 3 percent and that income elasticity of demand for housing in Tokyo is estimated to be between 0.8 and 1.0 for rental units and between 0.7 and 1.5 for owner-occup..

  What is the companys average accounts receivable

Medwig Corporation has a DSO of 42 days. The company averages $4,500 in credit sales each day. What is the company's average accounts receivable? Round your answer to the nearest dollar.

  Procrastinators anonymous is hosting their annual convention

Procrastinators Anonymous (PA) is hosting their annual convention this coming year in Dallas, TX. Although this is not typical of this organization, they wish to plan ahead to determine what the cost of the keynote banquet ticket should be.

  Explain what is the expected return of stock g

What are the expected returns of each of the four individual assets using CAPM if the line equations is plotted with an intercept of 3.0% (risk-free rate) and a market premium of 10.5% (slope of the line)? What is the expected return of stock G, H,..

  How much would you be willing to pay for this security

Suppose that one year has elapsed, you have received the first payment of $600, and the market interset rate is still 5 percent. How much would another investor be willing to pay for your security?

  Calculate future cash flows precisely and obtain exact value

Do you agree or disagree with the following statement given the discussion in this chapter? We can calculate future cash flows precisely and obtain an exact value for the NPV of an investment

  Explain the functions of financial markets

Explain the functions of financial markets and discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.

  Which bond offers the higher after tax yield

Which bond offers the higher after tax yield? If you also pay a state income tax on taxable coupon interest at a 9 percent rate, but no tax on municipal interest, which bond offers the higher after tax yield?

  What is the stocks value per share

Smith Technologies is expected to generate $175 million in free cash flow next year, and FCF is expected to grow at a constant rate of 6% per year indefinitely. Smith has no debt or preferred stock, and its WACC is 12%. If smith has 65 million shares..

  Calculate the periodic depletion for first year of operation

Black Gold Oil purchased a parcel of land containing an estimated 2 million barrels of crude oil for $850,000. Two oil wells were drilled at a cost of $340,000. The residual value of the property and equipment is $50,000. Calculate the periodic deple..

  Find the companys price-to-earnings ratio

Today the company announces net income equals $12 million. They have 30 million shares outstanding, and today’s share price is $68.21. Find the company’s price-to-earnings ratio.

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