Question
Assume a firm that has a debt payment of $100 due next year. There is 50% chance that the firm only has $60 and defaults.
Assume a firm that has a debt payment of $100 due next year. There is 50% chance that the firm only has $60 and defaults. A prospective project that shareholders are considering will cost $30 and will yield $50 in the next period. What is the NPV for the shareholders to invest in this project if it is completely financed by equity (assume a zero discount rate)?
a) 5
b) 0
c) -5
d) -10
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Derivatives Markets
Authors: Robert McDonald
3rd Edition
978-9332536746, 9789332536746
