Question

Acort Industries owns assets that will have a( n)65% probability of having a market value of $52 million in one year. There is a 35% chance that the assets will be worth only $22 million. The current risk-free rate is 3%, and Acort's assets have a cost of capital of 6%. 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 $16 million due in one year. According to M\&M, 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? a. If Acort is unlevered, what is the current market value of its equity? The current market value of the unlevered equity is $ million. (Round to three decimal places.)

Answer 1

The current market value of Acort Industries' unlevered equity is found by calculating the expected market value of their assets in one year, then discounting it back to the present at the risk-free rate, which results in approximately $40.291 million.

Step-by-step explanation:

To determine the current market value of Acort Industries' unlevered equity, we need to calculate the expected market value of the assets in one year and then discount it back to the present using the risk-free rate. The expected market value (EMV) is calculated as follows:

1. EMV = (Probability of high value * High asset value) + (Probability of low value * Low asset value)
2. EMV = (0.65 * $52 million) + (0.35 * $22 million)
3. EMV = ($33.8 million) + ($7.7 million)
4. EMV = $41.5 million

Now, to find the present value (PV), we use the risk-free rate to discount the EMV:

1. PV = EMV / (1 + risk-free rate)
2. PV = $41.5 million / (1 + 0.03)
3. PV = $41.5 million / 1.03
4. PV = $40.291262 million

Therefore, the current market value of Acort's unlevered equity is approximately $40.291 million.