A firm’s assets have a market value of $500m; the asset returns have a standard deviation of 25% per year. The firm is financed with zero coupon debt having a face value of $400m and maturing in 5 years. The (continuously compounded) risk free rate is 5%. What is the value of the debt and the equity?
The question belongs to Finance and it discusses about calculation of debt and equity of a firm with market value of its assets given and the firm being financed by zero coupon debt.
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