Explore BrainMass

Gephardt, Armey and Gore

13. Gephardt, Armey and Gore, a vaudeville booking agency, has issued zero-coupon corporate debt this week, consisting of 80 bonds, each with a face value of $1,000 and a term to maturity of one year. Industry analyst predict that the value of GAG assets will be $160,000 in one year if Rupert Murdoch succeeds in purchasing and converting the Washington Press Club to a comedy venue, $130,000 if Murdoch buys the comedy venue in Washington. Industry analysts also predict that the aggregate value of the assets of a second firm in the field of comedy entertainment, Yeltsin Yuks, Ltd., will have the values of $100,000, and $100,000, and $40,000, in the there respective circumstances. Assuming that investors can purchases portfolios comprised of shares of the assets of GAG and YY Ltd., as well as buying or short-selling one year, zero coupon, government bonds at the risk less annual rate .10, then:

a. Infer the three alternative values for aggregate values for aggregate equity in GAG, one year from today.
b. Devise a portfolio that is a perfect substitute for the payoffs given by a portfolio composed only of equity in GAG.
c. Determine the current market value of a share of equity in GAG, assuming 10,000 shares of GAG stock are outstanding, the current market value of GAG assets is $120,000, and the current market value of YY Ltd. Assets is $85,725.
d. Determine the current market value of a bond issued by GAG, assuming 80 bonds are issued, under these circumstances. What is the yield to maturity on each such bond?

Solution Summary

This posting provides the solution to the student's problem.