Q2: The All-Mine Corporation is deciding whether to invest in a new project. The project would have to be financed by equity, the cost is $2,100, and the return will be $2,600 in one year. The discount rate for both bonds and stock is 15 percent and the tax rate is zero. The predicted cash flows excluding this new project are $4,600 in a good economy, $3,100 in an average economy, and $1,100 in a poor economy. Each economic outcome is equally likely to occur and the promised debt repayment is $3,100. Should the company take the project? What is the value of the firm and its debt and equity components before and after the project addition? 2

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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Q2: The All-Mine Corporation is deciding whether to invest
in a new project. The project would have to be financed by
equity, the cost is $2,100, and the return will be $2,600 in
one year. The discount rate for both bonds and stock is 15
percent and the tax rate is zero. The predicted cash flows
excluding this new project are $4,600 in a good economy,
$3,100 in an average economy, and $1,100 in a poor
economy. Each economic outcome is equally likely to occur
and the promised debt repayment is $3,100. Should the
company take the project? What is the value of the firm and
its debt and equity components before and after the project
addition?
Transcribed Image Text:Q2: The All-Mine Corporation is deciding whether to invest in a new project. The project would have to be financed by equity, the cost is $2,100, and the return will be $2,600 in one year. The discount rate for both bonds and stock is 15 percent and the tax rate is zero. The predicted cash flows excluding this new project are $4,600 in a good economy, $3,100 in an average economy, and $1,100 in a poor economy. Each economic outcome is equally likely to occur and the promised debt repayment is $3,100. Should the company take the project? What is the value of the firm and its debt and equity components before and after the project addition?
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