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

question 36

Essay

The All-Mine Corporation is deciding whether to invest in a new one-year project.The project would have to be financed by equity,the cost is $2,000,and the return will be a guaranteed $2,500 in one year.The discount rate for both bonds and stock is 15 percent and the tax rate is zero.The predicted cash flows excluding this new 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 to occur and the promised debt repayment is $3,000.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:

Output

The volume of output in terms of products or services from a business, sector, or country within a designated timeframe.

Units

Units are standard measures or quantities used to specify or quantify the dimensions, amount, or capacity of something.

Price-Output Combination

The specific level of output and the price at which that output is sold in the market, relevant in contexts of market equilibrium and firm strategies.

Total Revenue

The total amount of money a firm receives by selling goods or services.