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Homework answers / question archive / A firm is worth $75 or $210 with equal probability and is financed with debt that has a face value of $80

A firm is worth $75 or $210 with equal probability and is financed with debt that has a face value of $80

Finance

A firm is worth $75 or $210 with equal probability and is financed with debt that has a face value of $80. It is considering a new project that is equally likely to be worth - $50 or +$55. The cost of capital is 12% for all securities. Calculate the present values of the firm's debt and equity, assuming that the project is not undertaken. O Debt 69.2; Equity 58.04 Debt 80; Equity 47.23 Debt 80: Equity 62.5 O Debt 63.62; Equity 63.62

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Calcualte the value of the firm if the project is not under taken as follows:

Value of firm = value 1 * Probabaility 1 + Value 2 * Probabilty 2

= 75 * 0.5 + 210 * 0.5

= 37.5 + 105

= 142.5

Amount of debt =$80

Amount of equity = Total value - Amount of debt

= 142.5 - 80

=$62.5

Therefore, Third option is correct.

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