Mostly Right, Inc. has assets that are currently valued at $1,500. One year from now, the assets are expected to be worth either $1,300 or $1,900. The company also has a zero coupon bond issue
With a face value of $1,400 that is due in one year. The risk-free rate of return is 4%. What is the
Value of the equity in Mostly Right, Inc.?
A) $0
B) $48.33
C) $166.67
D) $208.33
E) $250.00

Question

Quizplus · Accepted Answer

The value of the equity is the value of the assets minus the value of the debt. The value of the assets is the expected value of the future cash flows, which is (0.5 * $1,300) + (0.5 * $1,900) = $1,600. The value of the debt is the present value of the future cash flow, which is $1,400 / (1 + 0.04) = $1,346.15. Therefore, the value of the equity is $1,600 - $1,346.15 = $253.85.