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Tom [10]
3 years ago
11

Acort Industries owns assets that will have a 75% probability of having a market value of $52 million in one year. There is a 25

% chance that the assets will be worth only $22 million. The current risk-free rate is 5%, and Acort's assets have a cost of capital of 10%. 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 $18 million due in one year. According to MM (i.e. perfect market), 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?
Business
1 answer:
abruzzese [7]3 years ago
8 0

Solution :

a). The current market value of the unlevered equity

   $=\frac{75\% \times \$52 \text{ million} + 25\% \times \$22 \text{ million}}{1+10 \%}$

   = $ 40.45 million

b). The market value of the equity one year from now is

  $=(75\% \times \$52 \text{ million} + 25\% \times \$22 \text{ million})- \$18 \ \text{million}$

  = $ 44.5 million - $ 18 million

  = $ 26.5 million

c). The expected return on the equity without the leverage = 10%

     The expected return on the equity with the leverage =   $=10\% +\frac{ \$22 \text{ million}}{\$ 26.5 \text{ million}}$

= 0.93 %

d). The lowest possible value of equity without the leverage = $20 million - $ 18 million

= $ 2 million

The lowest return on the equity without the leverage = 10%

The lowest return on the equity with the leverage = 2 % as the equity is eroded.

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<h3><em>B</em><em>ut remember that the depreciation calculated for the accounting period would be expensed out by $500 in the income statement, for the period generated.</em></h3>
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3 years ago
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The correct answer is letter "C": both frictional unemployment and the natural rate of unemployment.

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Natural unemployment is defined as the lowest rate of unemployment an economy will reach. It is called natural because its causes are other than an adverse economy. Natural unemployment is a combination of <em>frictional unemployment</em> -employment transitions, <em>structural unemployment</em> -mismatch between abilities and current position, and <em>labor surplus</em>.

Unions are groups of individuals who join to set minimum standards at work in regards to wages, compensations, and conditions. <em>Union members are, by default, always available to join the workforce even if there is work to be done or not. Sometimes, union members are assigned duties their abilities outperform just to avoid having the member unemployed. These are the reasons why unions are said to contribute to natural unemployment.</em>

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4 years ago
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Explanation:

This can be easily understood by going through some calculations in a spending multiplier formula.

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The formula for Spending Multiplier = \frac{1}{MPS}

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On behalf of the above calculations,  option B is a perfect match!

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Based on the information given the account that are affected is:

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