Part 9 (ch16) Questions Numeric
Last updated: 27/05/2025
Type your answers with “.” instead of “,”! For numerical answers, use 2 decimal places. For instance, if your answer is 0.12345 or 12.345%, type, “12.34” in the box.
Q1
Q: Aurora Labs is ready to launch a new product. Depending on the success of this product, Aurora will have a value of either $103, 98, 103, 96, 99, 99, 104, 96, 101, 98 million, $151, 147, 147, 151, 153, 152, 147, 150, 150, 153 million, or $195, 188, 193, 185, 190, 196, 191, 191, 189, 190 million in one year, with each outcome being equally likely. Because the project risk is fully diversifiable (beta = 0), the appropriate discount rate is the risk-free rate, currently 7%.
What is the present value of Aurora Labs today (in million dollars), assuming perfect capital markets and no bankruptcy costs?
Answer: 140, 135, 138, 135, 138, 139, 138, 136, 137, 137 million dollars
Q2
Assume that in the event of default, 20% of Aurora Labs’ asset value is lost to bankruptcy costs, and suppose that Aurora has zero-coupon debt with a $125 million face value due in one year. What is the initial value of Aurora’s debt (in million dollars)?
Answer: 142.8, 137.8, 140.8, 137.6, 140.7333333, 142.4, 140.4, 139.2666667, 139.9333333, 140.4666667