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Sunburn Sunscreen has a zero coupon bond issue outstanding with a $11,000 face value that matures in one year. The current market value of the firm’s assets is $13,100. The standard deviation of the return on the firm’s assets is 34 percent per year, and the annual risk-free rate is 5 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $1,600, and Project B has an NPV of $2,400. As the result of taking Project A, the standard deviation of the return on the firm’s assets will increase to 48 percent per year. If Project B is taken, the standard deviation will fall to 19 percent per year.

a-1. What is the value of the firm’s equity and debt if Project A is undertaken?

a-2. What is the value of the firm’s equity and debt if Project B is undertaken?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M93050249

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