Dairy Isle has a value of $59,000 in a good economy and $48,000 in a recession. The firm has $50,000 of debt. The probability of a recession is 32 percent. The firm is considering a project that would change the firm values to $63,000 in a good economy and $46,000 in a recession. Which one of the following statements correctly describes the effects of this project?

Multiple Choice

• The bondholders and stockholders equally share the increase in firm valuation.

• The bondholders are unaffected by the project.

• The project transfers $640 from bondholders to stockholders.

• The shareholders gain $2,080 while the bondholders are unaffected.

• The shareholders gain an amount equal to 68 percent of the increase in the firms value.