A firm has a 40% chance of producing $90 in cash flows next year, and a 60% chance of producing $200 in cash flows. Assume risk neutrality and a cost of capital of 9%.
-Refer to the information above. What is the value of the firm if debt has a face value of $50?

Question

Quizplus · Accepted Answer

The expected cash flow for the firm is:
0.4($90) + 0.6($200) = $156
The value of the firm is therefore:
$156 / (0.09) = $1733.33
If debt has a face value of $50, we subtract that from the value of the firm:
$1733.33 - $50 = $1683.33
Therefore, the correct answer is C) $143.12.

A Firm Has a 40% Chance of Producing $90 in Cash