assignment3 solutions

Assignment3 solutions

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Unformatted text preview: te. 2. a) PV(bond) = 0.5(50) + 0.5(20) = 35 (No discounting). PV(equity) = 0.5(50) = 25 b) 50/35 – 1 = 42.8%. c,d) Returns in sunshine: bond = 42.8 %, equity = 100%. Returns in rain: bond = -42.8%, equity = -100%. e) Bond holders get 50 if sunshine and 30 if rain. PV(bond) = 40, PV(equity) = 20. Returns: bond = plus or minus 25%, equity = plus or minus 100%. This reorganization transfers value from equity holders to bond holders. Note that the total value of the firm is still bond + equity = 60. Equity holders have nothing to gain from this, although it would benefit bond ho...
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This document was uploaded on 02/27/2014 for the course ECON 1745 at Harvard.

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