Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 16, Problem 12P
a)
Summary Introduction
To determine: Company F’s equity worth by using Black-Scholes option model.
b)
Summary Introduction
To determine: Current worth of debt and yield.
c)
Summary Introduction
To discuss: Impact of equity value and yield on debt change on reducing the volatility to 30%.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
XYZ Corporation has zero-coupon debt outstanding which has a face value of $400, due in five years. The
market value of the firm's assets now doubles the face value of debt. The annualized standard deviation in
values of comparable firms is 10% on a annual basis. The five-year T-bond rate is 5%. Estimate the value
equity, using an option pricing model (keep two decimal places).
Your Answer:
Answer
Your broker has recommended that you purchase stock in Beacan, Inc. Beacan recently paid its annual dividend ($14.00). The firm also boasts an ROE of 15%, of which 50% is paid as dividends. Analysts estimate that the stock has a beta of 0.79. The current risk-free rate is 2.00% and the market return (RM) is 11.10%. Assuming that CAPM holds, what is the intrinsic value of this stock?
The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1 - year coupon debt is $200 million. The volatility (\ sigma) of Wilson Dover's total value is 0.60, and the risk free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050. Refer to the data for Wilson Dover Inc. What is the value (in millions) of Wilson Dover's debt if its equity is viewed as an option? a. $247.82
b. $186.19
c. $167.57
d. $204.81
e $225.29
Chapter 16 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 16 - Prob. 1QCh. 16 - Prob. 2QCh. 16 - Prob. 3QCh. 16 - One type of leverage affects both EBIT and EPS....Ch. 16 - Prob. 5QCh. 16 - Prob. 6QCh. 16 - Prob. 7QCh. 16 - Prob. 8QCh. 16 - Prob. 9QCh. 16 - Prob. 1P
Ch. 16 - Unlevered Beta
Counts Accounting’s beta is 1.15...Ch. 16 - Premium for Financial Risk
Ethier Enterprise has...Ch. 16 - Value of Equity after Recapitalization Nichols...Ch. 16 - Stock Price after Recapitalization Lee...Ch. 16 - Prob. 6PCh. 16 - Prob. 7PCh. 16 - Capital Structure Analysis Pettit Printing Company...Ch. 16 - Optimal Capital Structure with Hamada
Beckman...Ch. 16 - WACC and Optimal Capital Structure F. Pierce...Ch. 16 - Prob. 12PCh. 16 - Prob. 1MCCh. 16 - Prob. 2MCCh. 16 - Prob. 3MCCh. 16 - Prob. 4MCCh. 16 - Prob. 5MCCh. 16 - Prob. 6MCCh. 16 - What does the empirical evidence say about capital...Ch. 16 - Suppose there is a large probability that L will...Ch. 16 - What is the value of Ls stock for volatilities...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- XYZ Corporation has zero-coupon debt outstanding which has a face value of $200, due in five years. The market value of the firm's assets now doubles the face value of debt. The annualized standard deviation in firm values of comparable firms is 10% on a annual basis. The five-year T-bond rate is 5%. Estimate the value of equity, using an option pricing model (keep two decimal places).arrow_forwardEquity as an option Carlson Co. is a manufacturing firm. Carlson Co.’s current value of operations, including debt and equity, is estimated to be $15 million. Carlson Co. has $6 million face-value zero coupon debt that is due in five years. The risk-free rate is 5%, and the volatility of companies similar to Carlson Co. is 50%. Carlson Co.’s performance has not been very good as compared to previous years. Because the company has debt, it will repay its loan, but the company has the option of not paying equity holders. The ability to make the decision of whether to pay or not looks very much like an option. Based on your understanding of the Black-Scholes option pricing model (OPM), calculate the following values and complete the table. (Note: Use 2.7183 as the approximate value of e in your calculations. Also, do not round intermediate calculations. Round your answers to two decimal places.) Carlson Co. Value (Millions of dollars) Equity value_______ 9.88 or 11.53 or 10.98 or 10.43…arrow_forwardThe total market value of the equity of Okefenokee Condos is $3 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 1.1 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? Note: Do not round intermediate calculations. Enter your answer as a whole percent. b. Estimate the WACC assuming a tax rate of 21%. Note: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. c. Estimate the discount rate for an expansion of the company's present business. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.3.…arrow_forward
- The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupon debt is $200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050.Refer to the data for Wilson Dover Inc. What is the yield on Wilson Dover's debt? a. 7.05% b. 6.70% c. 6.04% d. 7.42% e. 6.36%arrow_forwardD4) Consider a firm with zero-coupon bonds that mature in 1 year and combined face value of $100,000. The market value of the firm's assets is $95,000 and the standard deviation of returns of the assets is 15%. The risk-free rate is continuously compounded 6%. What is the value of the equity? Answer: $6,076 How to get this answer please!arrow_forward) You purchased stock in Cough For Dollars (CFD), a disposable mask producer. You will hold this investment for one year. At the end of this period, there are three possible outcomes: i. Recession, the probability of which is 20%. CFD stock return will be -30% in this scenario. i. Stagnation, the probability of which is 50%. CFD stock return will be 5% in this scenario. ii. Expansion, the probability of which is 30%. CFD stock return will be 20% in this scenario. a. Compute your expected return from holding stock in CFD. b. Compute the standard deviation of this return. E3 Focus MacBook Proarrow_forward
- The total market value of the equity of Okefenokee Condos is $8 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 0.6 and that the expected risk premium on the market is 10%. The Treasury bill rate is 4%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Estimate the WACC assuming a tax rate of 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. Estimate the discount rate for an expansion of the company’s present business. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is .8. What is the…arrow_forwardThe total market value of the equity of Okefenokee Condos is $8 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 0.6 and that the expected risk premium on the market is 10%. The Treasury bill rate is 4%, and investors believe that Okefenokee's debt is essentially free of default risk. a. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a whole percent.) b. Estimate the WACC assuming a tax rate of 21%. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) c. Estimate the discount rate for an expansion of the company’s present business. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) d. Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is .8. What is the…arrow_forwardThe Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm's weighted average cost of capital. The balance sheet and some other information are provided below. Assets $ 38,000,000 101,000,000 $139,000,000 Current assets Net plant, property, and equipment Total assets Liabilities and Equity Accounts payable $ 10,000,000 9,000,000 $ 19,000,000 40,000,000 $ 59,000,000 Accruals Current liabilities Long-term debt (40,000 bonds, S1,000 par value) Total liabilities Common stock (10,000,000 shares) Retained earnings Total shareholders' equity Total liabilities and shareholders' equity 30,000,000 _50,000,000 _80,000,000 $139,000,000 The stock is currently selling for $15.25 per share, and its noncallable $1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and the yield on a 20-year Treasury bond is 5.50%. The required return on the stock market is…arrow_forward
- Zipliners R Us is a fairly new business with a market price of $30 and Rose Gardens anticipates that their dividends will grow at a rate of 3% for the foreseeable future. The next dividend is expected to be $1.50. Calculate the value of the securities, recommend to Rose Gardens if the investment will make the sense if they have $50,000 to invest and the expected rate of return for all securities mentioned above is 7%arrow_forwardThe total market value of the equity of Okefenokee Condos is $3 million, and the total value of its debt is $2 million. The treasurer estimates that the beta of the stock currently is 1.1 and that the expected risk premium on the market is 10%. The Treasury bill rate is 5%, and investors believe that Okefenokee's debt is essentially free of default risk. What is the required rate of return on Okefenokee stock? (Do not round intermediate calculations. Enter your answer as a whole percent.) Estimate the WACC assuming a tax rate of 21%.(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Estimate the discount rate for an expansion of the company’s present business. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Suppose the company wants to diversify into the manufacture of rose-colored glasses. The beta of optical manufacturers with no debt outstanding is 1.3. What is the required…arrow_forwardMiltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 6% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.66.Required: a. Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. What is the intrinsic value of the stock?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY