Question: Rackin Pinion Corporation's assets are currently worth $900. In one year, they will be worth either USD 600 or USD 1200. The risk-free interest rate is five percent. Assume Rackin Pinion has an outstanding debt issue with a face value of USD 600.
[A] Rackin issues a new corporate bond with a face value of $200. If the bond is junior to the existing debt, i.e., paid only after the existing debt holders are paid in full. Determine the value of the new bond? Calculate the appropriate interest rate?
[B] In part (c), what is the value of existing debt and equity?
[C] In part (c), assume instead the new bond is senior to the existing debt (i.e., paid in full before the existing debt holders are paid anything). What is the value of new bond and the corresponding interest rate?
[D] In part (e), what is the value of existing debt and equity?
[E] Determine the current value of the debt? The interest rate of the debt?
[F] Determine the current value of the equity?