1. A company has a zero coupon bond issue outstanding with a par (or face)...
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1. A company has a zero coupon bond issue outstanding with a par (or face) value of $300,000,000 that matures in 30 months. The current market value of the firm's assets is $400,000,000. The standard deviation of the returns on the firm's assets (volatility) is 0.50 (or 50 percent) per year, and the annual risk-free rate is 5 percent, compounded continuously. a) The firm has a new project available. The net present value of the project is $50,000,000. If the company undertakes the project, what is the value of the firm's equity based on the Black-Scholes option pricing model? What is the current value of the firm's debt? Assume that volatility remains the same at 50%. b) What is the firm's continuously compounded cost of debt after the project is undertaken
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