Company ABC just sold their most profitable division for $100 million in cash. The company has a market value balance sheet shown below (in millions). The bonds outstanding have an annual payment that is due in one month that equals 10% of the book value (400 x .10 = $40 million). Note: If the payment is not made on time it accrues a penalty of 1% or $400,000 per month unpaid: Assets BV MV Liabilities BV MV Cash $100 $100 LT bonds $400 $100 Fixed Asset $900 $0 Equity $600 $0 Total $1,000 $100 Total $600 $100 The board is considering using the $100 million to sponsor a music festival that might be a success or a failure. The expected payoffs are as follows: Probability Payoff 5% $500 25% $200 50% $50 20% $0 A) (i) What is the net present value of the music festival? (Assume the investment is immediate (time 0) and the payoff is one year from now (time 1) and the discount rate is 20%) (ii) Update the market value balance sheet above to reflect the expected market values in one year if the company takes the project (ignore adjusting for owed interest on the debt)?
Company ABC just sold their most profitable division for $100 million in cash. The company has a market value balance sheet shown below (in millions). The bonds outstanding have an annual payment that is due in one month that equals 10% of the book value (400 x .10 = $40 million). Note: If the payment is not made on time it accrues a penalty of 1% or $400,000 per month unpaid:
Assets BV MV Liabilities BV MV
Cash $100 $100 LT bonds $400 $100
Fixed Asset $900 $0 Equity $600 $0
Total $1,000 $100 Total $600 $100
The board is considering using the $100 million to sponsor a music festival that might be a success or a failure. The expected payoffs are as follows:
Probability Payoff
5% $500
25% $200
50% $50
20% $0
A)
(i) What is the
(ii) Update the market value balance sheet above to reflect the expected market values in one year if the company takes the project (ignore adjusting for owed interest on the debt)?
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