ABC corp. is partially funded with debt.The debt is zero-coupon,hasa$100 face value,and is due next...
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ABC corp. is partially funded with debt.The debt is zero-coupon,hasa$100 face value,and is due next year(t=1).The value of ABC's existing assets nextyear is extremely uncertain and can take any value between $80and$120.ABCalso has the opportunity to invest in a new safe project that requires an upfront investment of $10 (today) and that will yield a certain cash flow of $20nextyear.ABC can raise the $10 by issuing eguity in a perfectly competitive market. Suppose that before raising this money,you were the only shareholder of ABC.By how much will the market value of your existing shares increase after ABC raises the $10 and invests?Assume that the new equity holders will break even on average, that the risk-free rate is 9%, and that before investors learned about the newinvestment opportunity,the yield to maturity on ABCs debt was 10%
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