Question
Assume two companies, each with only one asset that will mature in one year for a cash value of $500. That asset (or any part
Assume two companies, each with only one asset that will mature in one year for a cash value of $500. That asset (or any part of it) can be exchanged for cash at present value, using 10% discount rate. That is the companies can cash in enough of the asset to provide for any required project investment. Company A is all equity financed and B has debt with par value of $400 to be paid in exactly one year (no interest, only par). Both companies are presented with a new project. The project will require a $300 investment and will have one payoff in one year. The payoff is $1,000 with 25% probability and zero otherwise. Assume risk adjusted discount rate is 10%. a. Will company A take the project? b. Will company B take the project? What is the project NPV to Bs shareholders?
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