Use the Information for the Question(s)below

question 7

Multiple Choice

Use the information for the question(s) below.
You own a small manufacturing plant that currently generates revenues of $2 million per year.Next year,based upon a decision on a long-term government contract,your revenues will either increase by 20% or decrease by 25%,with equal probability,and stay at that level as long as you operate the plant.Other costs run $1.6 million per year.You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital is 10%.
-If you are awarded the government contract and your sales increase by 20%,then the value of your plant will be closest to:

• A)$5 million.
• B)$8 million.
• C)$0.
• D)$4 million.

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Definitions:

New Project

A project that involves starting a new task, product, service, or process, which has not been undertaken by the organization before.

Flotation Costs

The expenses incurred by a company in issuing new securities, including legal, administrative, underwriting fees, and other associated costs.

Debt-Equity Ratio

An economic indicator showing the comparative mix of owner's equity and loans in funding a company's assets.

External Financing

Funds raised from outside the business, typically through borrowing or the issuance of equity.