The assets of Bill's Boats are currently worth $47,600. These assets are expected to be worth either $45,000 or $53,000 one year from now. The company has a pure discount bond outstanding with a $50,000 face value and a maturity date of one year. The risk-free rate is 4 percent. What is the value of the equity in this firm? (Round your answer to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

The equity value is the difference between the asset value and the bond face value when the asset value exceeds the bond face value. The expected equity value is calculated by considering the probabilities of the asset values and discounting at the risk-free rate.

The Assets of Bill's Boats Are Currently Worth $47,600