Suppose That JMK, Inc

question 46

Multiple Choice

Suppose that JMK, Inc. has debt with a face value of $100 million and assets worth $70 million. The firm's management has identified a risk-free project that will require an initial outlay of $10 million and will return a NPV of $16 million. The firm currently has no cash. What would be the net return to stockholders if they took on this project?

• A) −$10 million
• B) $0 million
• C) $26 million
• D) $70 million

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Definitions:

Economic Profit

The profit a company makes after deducting both its explicit (direct) and implicit (opportunity) costs; it's a more comprehensive measure than accounting profit.

Allocative Efficiency

The optimal distribution of resources in a market where goods and services are dispensed according to consumer preferences.

Monopolistic Competition

A market structure where many companies sell products that are similar but not identical, allowing for significant competition but with some control over prices.