24 Jul WHICH PROJECT DO BONDHOLDERS PREFER?
determine Strudler Real Estate Inc. a construction firm financed by both debt and equity is undertaking a n Show more Strudler Real Estate Inc. a construction firm financed by both debt and equity is undertaking a new project. If the project is successful the value of the firm in one year will be $380 million but if the project is a failure the firm will be worth only $240 million. The current value of Strudler is $280 million a figure that includes the prospects for the new project. Strudler has outstanding zero coupon bonds due in one year with a face value of $310 million. Treasury bills that mature in one year yield a 7 percent EAR. Strudler pays no dividends. a. Use the two-state option pricing model to calculate the current value of Strudlers debt and equity. (Enter your answers in dollars not millions of dollars i.e. 1234567. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g. 32.16)) Debt $ Equity $ b. Suppose Strudler has 950000 shares of common stock outstanding. What is the price per share of the firms equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g. 32.16)) Price per share $ c. Suppose that in place of the preceding project Strudlers management decides to undertake a project that is even more risky. The value of the firm will either increase to $415 million or decrease to $225 million by the end of the year. Surprisingly management concludes that the value of the firm today will remain at exactly $280 million if this risky project is substituted for the less risky one. Use the two-state option pricing model to determine the values of the firms debt and equity if the firm plans on undertaking this new project. (Enter your answers in dollars not millions of dollars i.e. 1234567. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g. 32.16)) Value of Debt $ Value of Equity $ d. Which project do bondholders prefer? Riskier project Conservative project Show less
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