ATC has a value of $70,000 in a good economy and $55,000 in a recession.The firm has $60,000 of debt.The probability of a recession is 50 percent.The firm is considering a project that would change the firm values to $73,000 in a good economy and $50,000 in a recession.If the firm accepts this project,the firm value will ______ and shareholder value will ______.
A)decrease by $1,000;decrease by $1,000
B)decrease by $2,000;decrease by $2,000
C)decrease by $1,000;increase by $1,500
D)increase by $1,500;increase by $1,500
E)increase by $1,500;decrease by $1,000

Question

Quizplus · Accepted Answer

Current firm value = .50 × $70,000 + .50 × $55,000 = $62,500Proposed firm value = .50 × $73,000 + .50 × $50,000 = $61,500Change in firm value = $61,500 - 62,500 = -$1,000Current shareholder value = .50 × ($70,000 - 60,000)+ .50 × $0 = $5,000Proposed shareholder value = .50 × ($73,000 - 60,000)+ .50 × $0 = $6,500Change in shareholder value = $6,500 - 5,000 = $1,500

ATC Has a Value of $70,000 in a Good Economy