Question
Hotznplotz GmbH has $50 million in debt outstanding. The firm's existing assets will produce cash flows next year and will be worthless thereafter. If the
Hotznplotz GmbH has $50 million in debt outstanding. The firm's existing assets will produce cash flows next year and will be worthless thereafter. If the economy is in a boom, the existing assets will produce $80 million whereas in a recession they will produce $20 million. The probability of a boom is 40% and that of a recession is 60%. The firm has the opportunity to invest in a project (codename: Alpha). The investment of $30 million would be financed by 50% equity and 50% debt. Project Alpha will produce a cash flow of $40 million for sure next year and nothing thereafter. The discount rate is zero. All debt must be repaid next year.
If the firm invests in Project Alpha, what total payoff can shareholders expect to receive next year? Please state your answer in $ millions, rounded to two digits.
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