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 in one year.The discount rate for both bonds and stock is 15% and the tax rate is zero.The predicted cash flows without the project 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 with or without the project.Should the company take the project?
What is the value of the firm and its debt and equity 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 in one year.The discount rate for both bonds and stock is 15% and the tax rate is zero.The predicted cash flows without the project 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 with or without the project.Should the company take the project?
 What is the value of the firm and its debt and equity 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 in one year.The discount rate for both bonds and stock is 15% and the tax rate is zero.The predicted cash flows without the project 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 with or without the project.Should the company take the project?
 What is the value of the firm and its debt and equity components before and after the project addition?

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