Business, 23.02.2020 05:11, soccerlyfe6839
(Expected return calculation) "DEF" is a firm that is traded on NASDAQ. On 1/1/2014, the company issued 10,000 zero coupon bonds. Each bond has a face value of $100 and matures on 1/1/2019. The bonds are the only debt of the company. A bond rating company estimated the total value of the DEF's assets on 1/1/2019 as follows:
Probability Value of DEF assets on 1/1/2019
0.2 2,000,000
0.3 1,750,000
0.4 1,200,000
0.1 1,000,000
Two years after the bond issue, on 1/1/2016, the bond rating agency reexamined the DEF Company and estimated the total value of the firm's assets as follows:
Probability Value of DEF assets on 1/1/2019
0.05 2,000,000
0.25 1,750,000
0.65 1,200,000
0.05 1.000.000
a. What will be the influence of the new probability distribution on the expected return on DEF bonds?
b. What will be the influence of the new estimation on the DEF stock price, assuming the cost of capital for the stock holders is 15%?
Answers: 1
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(Expected return calculation) "DEF" is a firm that is traded on NASDAQ. On 1/1/2014, the company iss...
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