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

question 69

Essay

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?

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Definitions:

Annually Compounded

Pertaining to the calculation and addition of interest to the principal sum once a year, affecting overall growth.

Successive Years

Consecutive years following one immediately after the other.

Missing Interest Rate

An interest rate that is not specified or known in a financial scenario, which may need to be calculated based on other given information.

Missing Interest Rate

The unknown rate of interest in a financial calculation that needs to be determined.