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Problem 22-32 Two-State Option Pricing and Corporate ValuationStrudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $300 million, but if the project is a failure, the firm will be worth only $200 million. The current value of Strudler is $240 million, a figure that includes the prospects for the new project. Strudler has outstanding zero coupon bonds due in one year with a face value of $270 million. Treasury bills that mature in one year yield a 7 percent EAR. Strudler pays no dividends.  a.Use the two-state option pricing model to calculate the current value of Strudler’s debt and equity.(Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))      Debt $     Equity$     b.Suppose Strudler has 460,000 shares of common stock outstanding. What is the price per share of the firm’s equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))    Price per share$     c.Suppose that in place of the preceding project, Strudler’s management decides to undertake a project that is even more risky. The value of the firm will either increase to $335 million or decrease to $185 million by the end of the year. Surprisingly, management concludes that the value of the firm today will remain at exactly $240 million if this risky project is substituted for the less risky one. Use the two-state option pricing model to determine the values of the firm’s debt and equity if the firm plans on undertaking this new project. (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))        Value of Debt $     Value of Equity$      d.Which project do bondholders prefer?   Conservative projectRiskier projectProblem 2Problem 22-30 Debt Valuation and Time to MaturityMcLemore Industries has a zero coupon bond issue that matures in two years with a face value of $33,000. The current value of the company’s assets is $18,800, and the standard deviation of the return on assets is 56 percent per year.  a.Assume the risk-free rate is 4 percent per year, compounded continuously. What is the value of a risk-free bond with the same face value and maturity as the company’s bond? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))   Risk-free bond value$     b.What price would the bondholders have to pay for a put option on the firm’s assets with a strike price equal to the face value of the debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))    Price of put option$     c-1Using the answers from (a) and (b), what is the value of the firm’s debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))    Value of firm's debt$     c-2Using the answers from (a) and (b), what is the continuously compounded yield on the company’s debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))    Return on debt %    d-1From an examination of the value of the assets of McLemore Industries, and the fact that the debt must be repaid in two years, it seems likely that the company will default on its debt. Management has approached bondholders and proposed a plan whereby the company would repay the same face value of debt, but the repayment would not occur for five years. What is the value of the debt under the proposed plan? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))    Value of debt$    d-2What is the new continuously compounded yield on the debt? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))    Return on debt %  Problem 3What is the duration of a bond with three years to maturity and a coupon of 8.7 percent paid annually if the bond sells at par? (Do not round intermediate calculations and round your final answer to 5 decimal places. (e.g., 32.16161))      Duration  Problem 4Suppose you sell six March 2012 silver futures contracts on November 22, 2011, at the last price of the day. Use Table 25.2.   What will your profit or loss be if silver prices turn out to be $31.39 per ounce at expiration? (input amount as a positive value. Do not round intermediate calculations.)     $      What will your profit or loss be if silver prices are $30.69 per ounce at expiration? (Input the amount as a positive value. Do not round intermediate calculations.)     $   Problem 5Suppose today is November 22, 2011, and your firm produces breakfast cereal and needs 100,000 bushels of corn in December 2011 for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might rise between now and December. Use Table 25.2   a.What is the total price are you locking in for the 100,000 bushels of corn based on the day's closing price? (Do not round intermediate calculations.Round your answer to 2 decimal places. (e.g., 32.16))     Total cost$      b.Suppose corn prices are $5.98 per pound in December. What is the profit or loss on your futures position? (Input the amount as positive value. Round your answer to 2 decimal places. (e.g., 32.16))     $   rev: 01_31_2015_QC_CS-2880
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