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

question 49

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. Calculate the present values of the firm's debt and equity if the project is undertaken.

• A)Debt = $45.00; Equity = $65.00
• B)Debt = $40.91; Equity = $59.09
• C)Debt = $40.18; Equity = $58.03
• D)Debt = $26.79; Equity = $49.11

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Definitions:

Organizational Learning

The process by which an organization improves itself over time through gaining experience, identifying and correcting mistakes, and adapting to the external environment.

Decision Making

The process of making choices by identifying a decision, gathering information, and assessing alternative resolutions.

Encoding And Decoding

The process of transforming ideas and messages into symbols for communication (encoding) and interpreting these symbols back into ideas (decoding).

Passbooks

Physical or electronic booklets used to record transactions of a savings account, including deposits, withdrawals, and interest accruals.