Strudler Real Estate, Inc., a construction firm financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $320 million, but if the project is a failure, the firm will be worth only $210 million. The current value of Strudler is $250 million, a figure that includes the prospects for the new project. Strudler has outstanding zero coupon bonds due in one year with a face value of $280 million. Treasury bills that mature in one year yield a 9 percent EAR. Strudler pays no dividends.
A. Use the two-state option pricing model to calculate the current value of Strudler’s debt and equity. (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
B. Suppose Strudler has 550,000 shares of common stock outstanding. What is the price per share of the firm’s equity? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
C. Suppose that in place of the preceding project, Strudler’s management decides to undertake a project that is even more risky. The value of the firm will either increase to $355 million or decrease to $195 million by the end of the year. Surprisingly, management concludes that the value of the firm today will remain at exactly $250 million if this risky project is substituted for the less risky one. Use the two-state option pricing model to determine the values of the firm’s debt and equity if the firm plans on undertaking this new project. (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))