Question

The assets of Uptown Stores are currently worth $346,000. These assets are expected to be worth either $320,000 or $365,000 one year from now. The company has a pure discount bond outstanding with a $350,000 face value and a maturity date of one year. The risk-free rate is 3.9 percent. What is the value of the equity in this firm?A) $9,915B) $12,671C) $9,507D) $11,347E) $10,015

Answer 1

Answer:

The correct answer is option (c).

Explanation:

According to the scenario, computation of the given data are as follow:-

Current worth of assets = $346,000

Bond face value  = $350,000

Time period = 1 year

So, Present value of bonds in one year at rate 3.9 % (By financial calculator) = $336,494.95

We can calculate the value of bond by using following formula:-

Value of bond = Current worth of assets - Present value of bonds in one year  

By putting the value, we get

= $346,000 - $336,495

= $9,505 ( It is closest to $9,507)