Question
ABC Technology is considering an investment in one of two mutually exclusive projects, A and B, which will generate the following cash flows in the
ABC Technology is considering an investment in one of two mutually exclusive projects, A and B, which will generate the following cash flows in the next year under different states of the economy:
Poor Good
Probability 0.4 0.6
Project A $850 $1,150
Project B $200 $1,400
The company has a debt with a face value of $570 to be paid in the next year. The company is deciding in what project to invest. Assume that the discount rate and the tax rate are zero. What is the value of the firm and its components under each project? Which project will the equity holders choose? Which stockholders-bondholders conflict this case represents?
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