Suppose two companies X and Z have exactly the same operating characteristics and their business risks are perfectly correlated (i.e., exactly the same cashflows). They differ only in the way they finance their operations. Both companies will be liquidated exactly one year from now and shareholders will receive a liquidating dividend at the end of the year. Company X is expected to pay a liquidating dividend of $55 million, but this is uncertain, so shareholders discount this dividend at a rate of 10%. Z has issued bond to finance its operations. Currently Z’s securities are trading as follows: Bonds $10 million Shares $42 million The bonds are AAA rated and the expected return is the same as on the risk free asset which is 5%. Bonds$10 millionShares$42 millionAnswerNeed Help With Your Assignment?Contact Me I will Do Assignment For Youhwhelp96@gmail.com
Suppose two companies X and Z have exactly the same operating characte
Suppose two companies X and Z have exactly the same operating characteristics and their business risks are perfectly correlated (i.e., exactly the same cashflows). They differ only in the way they finance their operations. Both companies will be liquidated exactly one year from now and shareholders will receive a liquidating dividend at the end of the year. Company X is expected to pay a liquidating dividend of $55 million, but this is uncertain, so shareholders discount this dividend at a rate of 10%. Z has issued bond to finance its operations. Currently Z’s securities are trading as follows: Bonds $10 million Shares $42 million The bonds are AAA rated and the expected return is the same as on the risk free asset which is 5%. Bonds$10 millionShares$42 millionAnswerNeed Help With Your Assignment?Contact Me I will Do Assignment For Youhwhelp96@gmail.com
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