estimate the market value of the debt 546377

McCaw Cellular Communications reported earnings before interest and taxes of $850 million in 1993 and had a depreciation allowance of $400 million in that year (which was offset by capital spending of an equivalent amount). The earnings before interest and taxes are expected to grow 20% a year for the next five years and 5% a year after that. The cost of capital is 10%. The firm has $10 billion in debt outstanding with the following characteristics.

The annualized standard deviation in the firm”s stock price is 35%, while the annualized standard deviation in the traded bonds is 15%. The correlation between stock and bond prices has been 0.5. The firm has a debt/equity ratio of 50% and the after-tax cost of debt is 6%. (The beta of the stock is 1.50; the 30-year treasury bond rate is 7%.) The three year bond rate is 5%.

a. Estimate the value of the firm.

b. Estimate the value of the equity.

c. The stock was trading at $60 and there were 210 million shares outstanding in January 1994. Estimate the implied standard deviation in firm value.

d. Estimate the market value of the debt.