Problem 1: If BEA Enterprise in ready to launch a new product. Depending upon the success of this product, BEA will have a value of either $100 million, $150 million, or $191 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 5%. Assume that the capital markets are perfect. The initial value of BEA's equity without leverage is closest to:
[Hint: Solve for Equity (unlevered) = Vu]
- $133 million
- $140 million
- $147 million
- $150 million
Problem 2: If BEA Enterprise in ready to launch a new product. Depending upon the success of this product, BEA will have a value of either $100 million, $150 million, or $191 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 5%. Assume that the capital markets are perfect. Suppose that BEA has zero-coupon debt with a $125 million face value due next year. The initial value of BEA's debt is closest to:
[Hint: Solve for Vdebt]
- $116 million
- $111 million
- $100 million
- $125 million
Problem 3: If BEA Enterprise in ready to launch a new product. Depending upon the success of this product, BEA will have a value of either $100 million, $150 million, or $191 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 5%. Assume that the capital markets are perfect. Suppose that BEA has zero-coupon debt with a $125 million face value due next year. The initial value of BEA's equity is closest to:
[Hint: Solve for VL]
- $15 million
- $24 million
- $29 million
- $30 million