M4 The cost of project X is $100, and it wouldgenerate $120 in one year without risk. If a firmdoes not invest in project X, then the firm value inone year would be at $500 in a boom and $100 if itis at recession. The chance of a boom is 50%, andthe chance of recession is 50%. The firm has a one-year debt, which would be matured in one year at$300. If project X is accepted, the cost is requiredto be financed by additional equity since the firmdoes not have cash recently. Assume the financialmanager would maximize the shareholders'wealth. If the appropriate discount rate is 10%,would the manager accept the project, and wouldthere be any under-investment problem? Explain itwith calculation.

The value added by the project would be the net present value of the project which is present value…

he cost of project X is $100, and it would enerate $120 in one year without risk. If a firm oes not invest in project X, then the firm value in ne year would be at $500 in a boom and $100 if s at recession. The chance of a boom is 50%, and he chance of recession is 50%. The firm has a one

he cost of project X is $100, and it would enerate $120 in one year without risk. If a firm oes not invest in project X, then the firm value in ne year would be at $500 in a boom and $100 if s at recession. The chance of a boom is 50%, and he chance of recession is 50%. The firm has a one

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 8P

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