Answered You can hire a professional tutor to get the answer.
QUESTION
A company's asset is worth 20 now, and will be worth 16 (in the bad state) or 24 (in the good state) with equal probabilities tomorrow. The riskfree...
A company’s asset is worth 20 now, and will be worth 16 (in the bad state) or 24 (in the good state) with equal probabilities tomorrow. The riskfree interest rate is 10%. The company lives for only one period. It promises to repay 18 to the debtholders next period.
- What is the value of debt?
- What is the expected yield of the debt? How does it compare with the riskfree rate?
- What is the value of equity?
- Suppose the company receives a government loan guarantee. What is the loan guarantee worth? What is the value of the company after it receives the loan guarantee? Why is the company worth more?
