Phil plc and Costas plc are identical firms except that Costas is more levered. Both companies will remain in busin year. The economy is has recently been expanding. According to consensus forecasts, the probability of the contia current expansion is 60% for the next year, and the probability of a recession is 40%. If the expansion continues, e generate profit before interest and taxes of £2 million. If a recession occurs, each firm will generate profit before in of £800,000. Phil's debt obligation requires the firm to pay £750,00y at the end of the year. Costas's debt obligation firm to pay £1 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 15 per cent. What is value of (i) Phil plc and (ii) Costas plc? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. None of the above

Essentials Of Investments
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ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Phil plc and Costas plc are identical firms except that Costas is more levered. Both companies will remain in business for one more
year. The economy is has recently been expanding. According to consensus forecasts, the probability of the continuation of the
current expansion is 60% for the next year, and the probability of a recession is 40%. If the expansion continues, each firm will
generate profit before interest and taxes of £2 million. If a recession occurs, each firm will generate profit before interest and taxes
of £800,000. Phil's debt obligation requires the firm to pay £750,00 at the end of the year. Costas's debt obligation requires the
firm to pay £1 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 15 per cent. What is the market
value of (i) Phil plc and (ii) Costas plc?
Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer.
None of the above
b
(i1) £1,321,739 and (i) £1,153,435
(1) £1,530,435 and (i) £1,530,435
d
(1) £1,321,739 and (il) £1,321,739
(1) £1,530,435 and (ii) £1,321,739
Unanswered
Save
Transcribed Image Text:Phil plc and Costas plc are identical firms except that Costas is more levered. Both companies will remain in business for one more year. The economy is has recently been expanding. According to consensus forecasts, the probability of the continuation of the current expansion is 60% for the next year, and the probability of a recession is 40%. If the expansion continues, each firm will generate profit before interest and taxes of £2 million. If a recession occurs, each firm will generate profit before interest and taxes of £800,000. Phil's debt obligation requires the firm to pay £750,00 at the end of the year. Costas's debt obligation requires the firm to pay £1 million at the end of the year. Neither firm pays taxes. Assume a discount rate of 15 per cent. What is the market value of (i) Phil plc and (ii) Costas plc? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. None of the above b (i1) £1,321,739 and (i) £1,153,435 (1) £1,530,435 and (i) £1,530,435 d (1) £1,321,739 and (il) £1,321,739 (1) £1,530,435 and (ii) £1,321,739 Unanswered Save
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