# solution

Company A has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment date. It has a price of \$99. What is the bondĂ˘â‚¬â„˘s yield to maturity?

a) Company A has just issued a callable (at par) three-year, 5% coupon bond with semiannual coupon payments. The bond can be called at par in two years or anytime thereafter on a coupon payment date. It has a price of \$99. What is the bondĂ˘â‚¬â„˘s yield to Call?

b) Consider a project with free cash flows in one year of \$134,902 or \$216,086, with each outcome being equally likely. The initial investment required for the project is \$105,212, and the projectĂ˘â‚¬â„˘s cost of capital is 22%. The risk-free interest rate is 10%. What is the NPV of this project?

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c) Consider a project with free cash flows in one year of \$133,197 or \$185,635, with each outcome being equally likely. The initial investment required for the project is \$104,259, and the projectĂ˘â‚¬â„˘s cost of capital is 21%. The risk-free interest rate is 8%. Suppose that to raise the funds for the initial investment, the project is sold to investors as an all-equity firm. The equity holders will receive the cash flows of the project in one year. How much money can be raised in this wayĂ˘â‚¬â€ťthat is, what is the initial market value of the unlevered equity?