Dairy Isle has a value of $59,000 in a good economy and $48,000 in a recession. The firm has $50,000 of debt. The probability of a recession is 32 percent. The firm is considering a project that would change the firm values to $63,000 in a good economy and $46,000 in a recession. Which one of these statements correctly describes the effects of this project? The project transfers $640 from bondholders to stockholders. The bondholders are unaffected by the project. The shareholders gain an amount equal to 68 percent of the increase in the firm's value. The shareholders gain $2,080 while the bondholders are unaffected. The bondholders and stockholders equally share the increase in firm valuation.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Dairy Isle has a value of $59,000 in a good economy and $48,000 in a recession. The firm has $50,000 of debt. The probability of a recession is 32 percent. The firm is considering a project that would change the firm values to $63,000 in a good economy and $46,000 in a recession. Which one of these statements correctly describes the effects of this project?
- The project transfers $640 from bondholders to stockholders.
- The bondholders are unaffected by the project.
- The shareholders gain an amount equal to 68 percent of the increase in the firm's value.
- The shareholders gain $2,080 while the bondholders are unaffected.
- The bondholders and stockholders equally share the increase in firm valuation.
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