Suppose a new venture promised the following payments in 5, Ask an Expert

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Suppose a new venture promised the following payments in 5 years with the associated probabilities as listed.

Payoff Probability

80,000,000 10%

110,000,000 20%

140,000,000 40%

170,000,000 20%

200,000,000 10%

Now assume that this venture is financed with equity and a 5 year zero coupon bond with a face value of 100,000,000. Use the contingent claims approach to debt security pricing to answer questions (b) through (d).

- Create a table showing the expected payoffs to debt and equity at maturity in each of the 5 possible states of the world. Assume there are no third party costs of distress in the event of a default.

Assume that the required risk premium over the risk free rate on the debt is 3%. Calculate the current value of the debt. Based on that value, what is the yield to maturity on the debt, assuming annual compounding?

- What is the present value of the equity? What is equity risk premium that is implied by that value?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92847909

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