Question

# 1.cort Industries owns assets that will have​ a(n) 75 % probability of having a market value of \$ 58 million one

year from now. There is a 25 % chance that the assets will be worth only \$ 28 million. The current​ risk-free rate is 2 %​, and​ Acort’s assets have a cost of capital of 4 %. a. If Acort is​ unlevered, what is the current market value of its​ equity? b. Suppose instead that Acort has debt with a face value of \$ 26 million due in one year. According to​ MM, what is the value of​ Acort’s equity in this​ case? c. What is the expected return of​ Acort’s equity without​ leverage? What is the expected return of​ Acort’s equity with​ leverage? d. What is the lowest possible realized return of​ Acort’s equity with and without​ leverage?

2.Hartford Mining has 60 million shares that are currently trading for \$ 3 per share and \$ 70 million worth of debt. The debt is risk free and has an interest rate of 5 %​, and the expected return of Hartford stock is 11 %. Suppose a mining strike causes the price of Hartford stock to fall 20 % to \$ 2.40 per share. The value of the​ risk-free debt is unchanged. Assuming there are no taxes and the risk​ (unlevered beta) of​ Hartford’s assets is​ unchanged, what happens to​ Hartford’s equity cost of​ capital?

A
2
a) If Acort is unlevered, what is the current market value of its equity?
million
4
equity value of assest= (75% x 58)+(25% x 28)
50.5
5
expected curant market value
50.5
6
cost of capital of =…
Finance