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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. 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
Expert Solution
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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