The Bakery's assets are currently valued at $2,306.These assets are expected to be worth either $2,100 or $2,600 one year from now.The company has a pure discount bond outstanding with a $2,500 face value and a maturity date of 1 year.The risk-free rate is 2.6 percent.What is the value of the equity in this firm?

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 value of the assets in one year, which is (0.5 * $2,100) + (0.5 * $2,600) = $2,350. The value of the debt is the present value of the face value of the bond, which is $2,500 / (1 + 0.026) = $2,440. Therefore, the value of the equity is $2,350 - $2,440 = $51.84.

The Bakery's Assets Are Currently Valued at $2,306