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Sunburn Sunscreen has a zero coupon bond issue outstanding with $20,000 face value that matures in one year. The current market value of the firm’s assets is $20,900. The standard deviation of the return on the firm’s assets is 26% per year, and the annual risk-free rate is 6% per year, compounded continuously.

Please calculate part A - the previous person didn't calculate it correctly

a) What is the market value of the firm’s equity and debt?

b) Suppose the firm is considering two mutually exclusive investments. Project A has an NPV of $800, and Project B has an NPV of $1,300. As a result of taking Project A, the standard deviation of the return on the firm’s assets will increase to 50% per year. If Project B is taken, the standard deviation will fall to 23%. What is the value of the firm’s equity and debt if Project A is undertaken? If Project B is undertaken?

c) What does the example suggest to you about stockholder incentives?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92100001

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