Compute the effect of the adoption of this project

Assignment Help Finance Basics

Reference no: EM131426981

Use the risk-neutral valuation method to directly show that the risk-neutral discounted value of the existing debt of Unitron is $636,000 higher if the project in Example 13.17 is adopted.

Example 13.17

Valuing Cash Flow to Equity Holders with Real Options In a two-date binomial model, assume that Unitron, from Example 13.16, has existing projects that generate a firm worth $110 million at date 1 if the up state occurs and $71.5 million if the down state occurs. Assuming no taxes, a risk-free rate of 10 percent, and riskneutral probabilities of 1⁄2 attached to each of the two states, Unitron's date 0 value is $82.5 million ( = [.5($110 million) + .5($71.5 million)]/1.1). Unitron currently has debt maturing at date 1 with a face value of $77 million and a date 0 market value of $67.5 million ( = [.5($77 million) + .5($71.5 million)]/1.1) and equity with a date 0 market value of $15 million ( = [.5($110 million $77 million) = .5($0)]/1.1). Anna Kramer identifies a riskless project that will cost Unitron $28.23 million and will produce a cash flow of $31.62 million at date 1, providing a 12 percent return. The project will be entirely financed with debt that is equal in seniority to Unitron's existing debt. Compute the effect of the adoption of this project on the value of Unitron's existing debt and on the value of its equity.

Reference no: EM131426981

Questions Cloud

Which of the following is not true about the piano : In ancient times, story tellers were considered to be of lowly status.The symphony orchestra evolved because composers needed more musicians to play in order to be loud enough to be heard by public audiences in large spaces.

Compute the net present value of the mold : The mold adds $100,000 to the firm's debt capacity in years 1 and 2, $50,000 in years 3 and 4, and zero in year 5. If Emruss has a borrowing rate of 6 percent and a tax rate of 50 percent, and will use its tax shields with certainty, what is the N..

Explain how the psychological contract can be integrated : Explain how the psychological contract can be integrated in Skyline Internationalconsidering the significant amount of negative feedback from staff being faced by the organisation?

Compute the effect of the adoption of this project : Use the risk-neutral valuation method to directly show that the risk-neutral discounted value of the existing debt of Unitron is $636,000 higher if the project in Example 13.17 is adopted.

Explain what the last stage in the cps : "Explain what the last stage in the CPS (Creative Problem Solving) Process (Control) means to you and how it ties back in to Stage 1 (Environmental Analysis).

Explain at least three challenges of succession planning : Analyze at least three challenges of succession planning for your selected agency. Propose at least three components of effective implementation of succession planning.

The internet age from society and technological change : As noted in this chapter, most smartphone owners use only a few apps for their phones. Are you one of them? Have you downloaded some apps only to later delete them? Why? Some of the most devoted designers and players of games have argued that game pl..

Identify multiple cultures the organization serves : Select a psychological disorder and a local organization that provides mental health services. Obtain faculty approval of your selected disorder before beginning this assignment. (I have requested permission to use Neurodevelopmental disorder: A..

User Account

All Pages