Valuation of a Company with a New Product Launch
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A company is on the verge of a new product launch. Depending on how well the product does in the marketplace, three possible outcomes for next years valuation are: $210m, $150m or $60m. The risk is diversifiable and the outcomes are equally likely. Assume that the risk free interest rate is 5% and ignore all other market imperfections, such as taxes. The company has $120 million in debt due next year.
1. What is the companies total value with leverage?
2. In the event of default 30% of the value of the companies assets will be lost in bankruptcy. What is the companies total value with leverage and distress costs?
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Discusses the valuation of a company with a new product launch.
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1. Expected value of valuation next year with leverage= (210+150+60)/3 million =$140 million
Present valuation of the company ...
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