Sunburn Sunscreen has a zero coupon bond issue outstanding with a $13,000 face v

Question

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $13,000 face value that matures in one year. The current market value of the firm’s assets is $13,200. The standard deviation of the return on the firm’s assets is 34 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $1,400, and Project B has an NPV of $2,200. 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 22 percent per year.

What is the value of the firm’s equity and debt if Project A is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

What is the value of the firm’s equity and debt if Project B is undertaken? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Sunburn Sunscreen has a zero coupon bond issue outstanding with a $13,000 face value that matures in one year. The current market value of the firm’s assets is $13,200. The standard deviation of the return on the firm’s assets is 34 percent per year, and the annual risk-free rate is 4 percent per year, compounded continuously. The firm is considering two mutually exclusive investments. Project A has an NPV of $1,400, and Project B has an NPV of $2,200. 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 22 percent per year.

Explanation / Answer

Firm's Assets      13,200.00 Less: Zero Coupon Bond      13,000.00 Equity 200.00 Debt      13,000.00 NPV Project A        1,400.00 Project B        2,200.00 a-1 Market Value Equity $1,600 Debt 13,000 a-2 Equity $2,400 Debt 13,000

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