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Corporation is considering an investment opportunity. The cost of the project is $1,000.Currently, the firm's assets-in-place will generate a cash flow of $5,000 or $2,400,
Corporation is considering an investment opportunity. The cost of the project is $1,000.Currently, the firm's assets-in-place will generate a cash flow of $5,000 or $2,400, depending on whether the market is under boom or recession. Boom and recession are equally likely. The new project will bring $1,700 in either state. CU Corporation has an outstanding debt of $1,400. Assume zero discount rate.
- (c)If the company decides to raise $1,000 in the debt market, will the existing shareholders support this decision? (5 marks)
- (d)What if the debt level of CU Corporation is $4,200? Will the existing shareholders contribute $1,000 to fund this investment? (7 marks)
- (e)Compare your results in part (b) and (d). Are there any differences? If so, explain why. (3 marks)
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