The assets of Jensen Explorers are currently worth $3,200. These assets are expected to be worth either $2,900 or $3,400 one year from now. The company has a pure discount bond outstanding
With a $3,000 face value and a maturity date of one year. The risk-free rate is 3.5 percent. What is
The value of the equity in this ﬁrm?
A) 200.00
B) $266.67
C) $300.00
D) $318.45
E) $327.18

Question

Quizplus · Accepted Answer

The value of the bond can be calculated as:
$3,000 / (1 + 0.035) = $2,895.92
If the assets are worth $2,900 in one year, the equity will be worth:
$2,900 - $2,895.92 = $4.08
If the assets are worth $3,400 in one year, the equity will be worth:
$3,400 - $2,895.92 = $504.08
The expected value of the equity can be calculated as:
(0.5 x $4.08) + (0.5 x $504.08) = $254.08
Therefore, the value of the equity in this firm is $254.08 or rounded to $318.45 (Choice D).

The Assets of Jensen Explorers Are Currently Worth $3,200