Consider a firm that has a single zero coupon bond issue outstanding with a face value of

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$40 million. It matures in five years. The risk-free rate is 4 per cent. The firm’s assets have a current market value of $35 million, and the firm’s equity is worth $15 million. If the firm takes a project with a $200 000 NPV, approximately how much will the shareholders gain?

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Asim farooq

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