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Everyone believes that next year the value of your firm will be at least $40 but not more than $100. That is, in the most
Everyone believes that next year the value of your firm will be at least $40 but not more than $100. That is, in the most pessimistic scenario, the value will be $40, and in the most optimistic scenario, the value will be $100. Your firm is financed with both debt and equity. The debt is zero-coupon, has a face value of $150, and will mature next year (t=1). The yield to maturity on the debt is currently 12%, and the risk-free rate is 7%. Your firm is considering raising $10 to invest in a safe project that will yield a certain cash flow of $20 next year. If the firm is able to raise the money in a perfectly competitive market (and the new equity holders break even on average), by how much will the market value of the existing equity increase
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