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CAR Inc. will be liquidated in one year. The value of CAR’s assets is currently $650 million, and next year it will be either $825 million or $400 million. Before shareholders can be paid next year, CAR will have to repay $500 million of debt. (I.e. CAR has zero coupon debt outstanding with exactly one year to maturity and a total face value of $500 million.) The risk free rate is 4%.

a) What is the current value of CAR’s equity?

b) What is the current value of CAR’s debt?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91610270

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