Use the following information to value a firm’s assets. Assume the following: the market value of the firm's assets is expected to remain constant over time so the firm doesn't grow and can be valued as a level perpetuity, the firm has a constant debt-to-assets ratio, the bonds are priced at par, and the stock's expected capital returns are zero. Relevant data: The number of shares on issue is 1 million and the number of bonds is 800,000 The constant annual dividend per share is $3 The bonds have an annual fixed coupon payment of $2.50 10-year government bonds have a yield of 2% and the market risk premium is 5% The beta of levered equity is 1.2 The beta of the bonds is 0.9 Which of the following is the market value of the levered firm’s assets? a. $68.3 million b. $21.2 million c. $70.1 million d. $42.9 million e. $54.7 million
Use the following information to value a firm’s assets. Assume the following: the market value of the firm's assets is expected to remain constant over time so the firm doesn't grow and can be valued as a level perpetuity, the firm has a constant debt-to-assets ratio, the bonds are priced at par, and the stock's expected capital returns are zero. Relevant data: The number of shares on issue is 1 million and the number of bonds is 800,000 The constant annual dividend per share is $3 The bonds have an annual fixed coupon payment of $2.50 10-year government bonds have a yield of 2% and the market risk premium is 5% The beta of levered equity is 1.2 The beta of the bonds is 0.9 Which of the following is the market value of the levered firm’s assets? a. $68.3 million b. $21.2 million c. $70.1 million d. $42.9 million e. $54.7 million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Use the following information to value a firm’s assets.
Assume the following:
- the market value of the firm's assets is expected to remain constant over time so the firm doesn't grow and can be valued as a level perpetuity,
- the firm has a constant debt-to-assets ratio,
- the
bonds are priced at par, and - the stock's expected capital returns are zero.
Relevant data:
- The number of shares on issue is 1 million and the number of bonds is 800,000
- The constant annual dividend per share is $3
- The bonds have an annual fixed coupon payment of $2.50
- 10-year government bonds have a yield of 2% and the market risk premium is 5%
- The beta of levered equity is 1.2
- The beta of the bonds is 0.9
Which of the following is the market value of the levered firm’s assets?
a.
$68.3 million
b.
$21.2 million
c.
$70.1 million
d.
$42.9 million
e.
$54.7 million
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