19.18 The value of a company's equity is $2 million and the volatility of its equity is 50%. The debt that will have to be repaid in one year is $5 million. The risk-free interest rate is 4% per annum. Use Merton's model to estimate the probability of default. (Hint: The Solver function in Excel can be used for this question

19.18 The value of a company's equity is $2 million and the volatility of its equity is 50%. The debt that will have to be repaid in one year is $5 million. The risk-free interest rate is 4% per annum. Use Merton's model to estimate the probability of default. (Hint: The Solver function in Excel can be used for this question

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter16: Capital Structure Decisions

Section: Chapter Questions

Problem 10MC: Suppose there is a large probability that L will default on its debt. For the purpose of this...

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4. Suppose a firm with a value of $60 million has a bond outstanding with a face value of $50 million that matures in 2 years. the current interest rate is 6% and the volatility of the firm is 25% what is the probability that the firm will default on its debt if the expected return on the firm, µ, is 30% ?what is the expected loss given default?
Suppose that =7% (na1), and that future short term (1 year) interest rates are expected to be 5% and 3% (for the subsequent two years). The liquidity premium for n2 and 3 is 0.25% and 0.35% respectively. a. Use the liquidity premium theory to calculate for ne2 and 3, and then plot the yield curve using your results. CALCULATE showing all work and ALL formulas that you use, b. Discuss what would be the impact on the yield curve in part a. if future short term rates were suddenly expected to rise.
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You have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations. b. What would the levered cost of equity equal for this firm at a debt-equity ratio (D:E) of 3:1? c. What would the required rate of return for the company equal if it were to be acquired under the leveraged buyout structure (i.e., what would the estimated firm WACC equal to under a…
You have the following initial information on which to base your calculations and discussion: Debt yield = 2.5% Required Rate of Return on Equity = 13% Expected return on S&P500 = 8% Risk-free rate (rF) = 1.5% Inflation = 2.5% Corporate tax rate (TC) = 30% Current long-term and target debt-equity ratio (D:E) = 1:3 a. What is the unlevered cost of equity (rE*) for this firm? Assume that the management of the firm is considering a leveraged buyout of the above company. They believe that they can gear the company to a higher level due to their ability to extract efficiencies from the firm’s operations. Thus, they wish to use a target debt-equity ratio of 3:1 in their valuation calculations.
9(b) You may assume the Merton model for credit risk holds true for this question. A companyhas fixed debt of £45 million with term two years, the current value of the company’sassets is £52 million. The risk-free rate of return is 4.5% per annum continuouslycompounded, the assets of the company follow geometric Brownian motion with volatility25% per annum and there are no other dividends or interest payments. Calculate the riskneutral probability of default.
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You Answered orrect Answer A company is promising a coupon payment of $46 in 2.03 years. A risk free government bond of the same maturity is yielding 1.66% per year. The credit spread for the promised payment by the company is 1.24% per year. Both the yield and the spread are stated on a continuously compounded basis. What is the present value of the expected loss on the promised payment? 1.11 margin of error +/-50
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