16.5 Fountain Corporation economists estimate that the probability of a good business environment next year is equal
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16.5 Fountain Corporation economists estimate that the probability of a good business environment next year is equal to the probability of a bad environment. Knowing that, the managers of Fountain must choose between two mutually exclusive projects. Suppose the project that Fountain chooses will be the only business it does next year. Therefore, the payoff of the project will determine the value of the firm. Fountain is obliged to make a
$500 payment to its bondholders. The first project is one of low risk.
If the firm does not undertake the low-risk project, it will choose the following highrisk project.
Which project would the stockholders prefer? Why?
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Related Book For 
Corporate Finance
ISBN: 9780071229036
6th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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