Dynron Corporations primary business is natural gas transportation using its vast gas pipeline network. The...
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Dynron Corporations primary business is natural gas transportation using its vast gas pipeline network. The firm is about to invest in a viber-optic network to generate revenues by selling high-speed network bandwidth. Depending upon the success of this investment, Dynron Corporation will have one of the three values next year: $80 million, $120 million, or $160 million, with each outcome being equally likely. The cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable) so that the project has a beta of 0 and a cost of capital equal to the risk-free rate, which is currently 2.7%. Assume that the capital markets are perfect, and that in the event of default, 15% of the value of Dynron Corporations assets will be lost in bankruptcy costs. Suppose that Dynron Corporation has zero-coupon debt with a $100 million face value due next year. The total value of Dynron Corporation with leverage is closest to:
a.
$94.77 million
b.
$112.95 million
c.
$116.85 million
d.
$338.85 million
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