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Shepard Industries has a project that will have a value of either $100 million, $150...

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Finance

Shepard Industries has a project that will have a value of either $100 million, $150 million, or $191 million, with each outcome being equally likely. The project lasts for one year. The cash flows are unrelated to the state of the economy (i.e. risk from the project is diversifiable, project beta is zero). Suppose that Shepard has zero-coupon debt with a $125 million face value due next year. The cost of capital is equal to the risk-free rate, which is currently 5%. Assume there is no tax. Express the final answers in millions, round to two decimal places, and do NOT include $ signs.

a. Assume the perfect capital markets for part a) only. What is the value of the unlevered firm?

b. Assume that in the event of default, 20% of the cash flow will be lost in bankruptcy costs. What is the value of Shepards debt? What is the value of Shepards equity? Separate the final answers by comma.

c. What is the present value of Shepards financial distress costs? What is the value of the levered firm? Separate the final answers by comma.

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