1) Universal Auto Limited has a zero coupon bond outstanding with a $50,000 face value that matures in one year. The current market value of the firm's assets is $58,000. The standard deviation of the return on the firm's assets is 28 percent per year, and the risk-free rate is 5 percent per year, compounded continuously. What is the market value of the firm's equity and debt? Use four decimal points for the cumulative probability computations.
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
1) Universal Auto Limited has a zero coupon bond outstanding with a $50,000 face value that matures in one year. The current market value of the firm's assets is $58,000. The standard deviation of the
2) Suppose the government provides a guarantee for the firm's bond. What will be the market value of the firm's debt? What is the value of the government's guarantee?
3) Continuing with part 2) above, the government guarantee may be regarded as a put option Who owns the put option? What is the exercise price of the put option? What should the shareholders and bondholders do if the asset value of the firm drops to $36,000 at the end of one year? Using the idea of options, explain why shareholders in a levered firm have incentives to undertake high risk investments.
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