Company X is due to repay £100m of debt at the end of next year and  its assets are currently worth £100m. The company has a project costing £100m now, which generates either £150m or £0 with equal probabilities in one year. Assume the company's cost of capital is 10%. Which of the following statements is the most accurate?     The company's shareholders will never consider investing in the project since its expected NPV is negative     The company's shareholders should invest in the project since its expected NPV is positive     Undertaking the project reduces bankruptcy risks     The shareholders of the company would benefit from undertaking the project because all the downside risk is borne by creditors

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Company X is due to repay £100m of debt at the end of next year and  its assets are currently worth £100m. The company has a project costing £100m now, which generates either £150m or £0 with equal probabilities in one year. Assume the company's cost of capital is 10%. Which of the following statements is the most accurate?

   

The company's shareholders will never consider investing in the project since its expected NPV is negative

   

The company's shareholders should invest in the project since its expected NPV is positive

   

Undertaking the project reduces bankruptcy risks

   

The shareholders of the company would benefit from undertaking the project because all the downside risk is borne by creditors

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