The All-Mine Corporation is deciding whether to invest in a new project. The project would have to be financed by equity,the cost is $2,000 and will return $2,500 or 25% in one year. The discount rate for both bonds and stock is 15% and the tax rate is zero. The predicted cash flows are $4,500 in a good economy,$3,000 in an average economy and $1,000 in a poor economy. Each economic outcome is equally likely and the promised debt repayment is $3,000. Should the company take the project?
What is the value of firm and its components before and after the project addition?

Question

The All-Mine Corporation is deciding whether to invest in a new project. The project would have to be financed by equity,the cost is $2,000 and will return $2,500 or 25% in one year. The discount rate for both bonds and stock is 15% and the tax rate is zero. The predicted cash flows are $4,500 in a good economy,$3,000 in an average economy and $1,000 in a poor economy. Each economic outcome is equally likely and the promised debt repayment is $3,000. Should the company take the project?
 What is the value of firm and its components before and after the project addition?

Quizplus · Accepted Answer

The Answer of The All-Mine Corporation is deciding whether to invest in a new project. The project would have to be financed by equity,the cost is $2,000 and will return $2,500 or 25% in one year. The discount rate for both bonds and stock is 15% and the tax rate is zero. The predicted cash flows are $4,500 in a good economy,$3,000 in an average economy and $1,000 in a poor economy. Each economic outcome is equally likely and the promised debt repayment is $3,000. Should the company take the project?
 What is the value of firm and its components before and after the project addition?

The All-Mine Corporation Is Deciding Whether to Invest in a New