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Question: Buckeye Industries has a bond issue with


Buckeye Industries has a bond issue with a face value of $1,000 that is coming due in one year. The value of the company’s assets is currently $1,060. The CEO believes that the assets in the company will be worth either $940 or $1,250 in a year. The going rate on one-year T-bills is 4.8 percent.
a. What is the value of the company’s equity? The value of the debt?
b. Suppose the company can reconfigure its existing assets in such a way that the value in a year will be $650 or $1,940. If the current value of the assets is unchanged, will the stockholders favor such a move? Why or why not?


2.99

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