Question

# 1.cort Industries owns assets that will have a(n) 75 % probability of having a market value of $ 58 million one

year from now. There is a 25 % chance that the assets will be worth only $ 28 million. The current risk-free rate is 2 %, and Acort’s assets have a cost of capital of 4 %. a. If Acort is unlevered, what is the current market value of its equity? b. Suppose instead that Acort has debt with a face value of $ 26 million due in one year. According to MM, what is the value of Acort’s equity in this case? c. What is the expected return of Acort’s equity without leverage? What is the expected return of Acort’s equity with leverage? d. What is the lowest possible realized return of Acort’s equity with and without leverage?

2.Hartford Mining has 60 million shares that are currently trading for $ 3 per share and $ 70 million worth of debt. The debt is risk free and has an interest rate of 5 %, and the expected return of Hartford stock is 11 %. Suppose a mining strike causes the price of Hartford stock to fall 20 % to $ 2.40 per share. The value of the risk-free debt is unchanged. Assuming there are no taxes and the risk (unlevered beta) of Hartford’s assets is unchanged, what happens to Hartford’s equity cost of capital?

A

2

a) If Acort is unlevered, what is the current market value of its equity?

million

4

equity value of assest= (75% x 58)+(25% x 28)

50.5

5

expected curant market value

50.5

6

cost of capital of =…

Finance