n face value EUR50,000 due next year. Th a cash flow next year of EUR100,000 with ersus doing nothing, which statements are

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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QUESTION 2
A company has EUR10,000 in cash, and debt with face value EUR50,000 due next year. The company has the possibility to invest in a project, which requires an investment of
all of its cash. The project is expected to produce a cash flow next year of EUR100,000 with probability 5 percent, and EUR10,000 otherwise. Assume a discount rate of 20
percent throughout. By implementing the project versus doing nothing, which statements are correct?
The value of the firm decreases
The value of debt decreases
The value of the firm increases
OThe value of equity decreases
The value of debt increases
Transcribed Image Text:QUESTION 2 A company has EUR10,000 in cash, and debt with face value EUR50,000 due next year. The company has the possibility to invest in a project, which requires an investment of all of its cash. The project is expected to produce a cash flow next year of EUR100,000 with probability 5 percent, and EUR10,000 otherwise. Assume a discount rate of 20 percent throughout. By implementing the project versus doing nothing, which statements are correct? The value of the firm decreases The value of debt decreases The value of the firm increases OThe value of equity decreases The value of debt increases
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