A Firm Is Worth $50 or $180 with Equal Probability

question 14

Multiple Choice

A firm is worth $50 or $180 with equal probability and is financed with debt that has a face value of $60. It is considering a new project that is equally likely to be worth -$50 or +$40. The cost of capital is 12% for all securities.
-Refer to the information above. What will happen to the value of the firm if the new project is undertaken?

• A)The value will decrease by $4.46.
• B)The value will decrease by $5.00.
• C)The value will increase by $10.00.
• D)The value will decrease by $8.93.

Interpret graphical representations of market conditions and the effects of market adjustments.

Identify the effects of external shocks (such as income changes or technological advancements) on market equilibria.

Determine the outcomes of excess supply or demand in market equilibrium.

Understand the implications of changes in income on demand for normal goods.

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Definitions:

GAAP

Generally Accepted Accounting Principles, a set of accounting standards and practices used to prepare financial statements.

Industry Classification

A system for categorizing companies and stocks based on their primary business activities.

Du Pont Identity

A financial analysis formula that breaks down return on equity into three components: profit margin, asset turnover, and financial leverage.

Operating Efficiency

A measure of the effectiveness and productivity with which a business or organization operates, often relating to how well it utilizes its resources.