Wicker Importers has total assets of $2,860. These assets are expected to increase in value to either $2,900 or $3,200 by next year. The company has a pure discount bond outstanding with a
Face value of $3,000.This bond matures in one year. Currently, Treasury bills are yielding 5 percent.
What is the value of the equity in this ﬁrm?
A) $65.40
B) $133.33
C) $140.00
D) $190.48
E) $200.00

Question

Quizplus · Accepted Answer

The value of the equity is the difference between the value of the assets and the value of the debt. The value of the assets is the expected future value, which is either $2,900 or $3,200. The value of the debt is the present value of the face value, which is $3,000 / (1 + 0.05) = $2,857.14. Therefore, the value of the equity is either $2,900 - $2,857.14 = $42.86 or $3,200 - $2,857.14 = $342.86. The correct answer is A, $65.40, which is the average of these two values.

Wicker Importers Has Total Assets of $2,860