Burger Queen has a value of $38,000 in a good economy and $24,000 in a recession.The firm has $25,000 of debt.The probability of a recession is 50 percent.The firm is considering a project that would change the firm values to $42,000 in a good economy and $22,000 in a recession.Will shareholders accept this project? Will bondholders like this project?
A)Both shareholders and bondholders will like this project.
B)Neither shareholders nor bondholders will like this project.
C)Shareholders,but not bondholders,will like this project.
D)Bondholders,but not shareholders,will like this project.
E)Shareholders will like this project but bondholders will be indifferent.

Question

Quizplus · Accepted Answer

Shareholders will like the project because it increases the firm's value in a good economy, potentially increasing their equity value. Bondholders will not like it because the firm's value in a recession decreases, increasing the risk of not fully recovering their debt.

Burger Queen Has a Value of $38,000 in a Good