Sample Problems on CoFd and ACoE

Sample Problems on CoFd and ACoE - HASS SCHOOL OF BUSINESS...

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H ASS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT B ERKELEY UGBA 103 S UMMER 2008 A VINASH V ERMA S AMPLE P ROBLEM ON C OSTS OF F INANCIAL D ISTRESS Both Firm A and Firm B have total assets with a market value of $120 million. For both firms, fixed assets account for 70% of the total assets, and cash available for investment accounts for the remaining 30%. The market value of the fixed assets is assumed to remain unchanged from year to year. Both firms have debt in their capital structure. The promised future value of the debt of Firm A, which is due in exactly a year, is $55 million. The rate of return on Firm A’s debt in both promised and the expected terms is 10%. All of Firm B’s debt is also due in exactly a year. Its promised future value is $168.75 million. The promised rate of interest on Firm B’s debt is 12.5%. Recall that the promised future value of debt equals the sum of the principal and interest. (a): Prepare the balance sheet for the two firms in terms of market value. Project X has a life of one year, and involves an outlay of $36 million. It will generate a
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Sample Problems on CoFd and ACoE - HASS SCHOOL OF BUSINESS...

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