Question
Montgomery Corp is currently worth $30 million as a company, but has $50 million of debt. There is a potential project that costs $60 million
Montgomery Corp is currently worth $30 million as a company, but has $50 million of debt. There is a potential project that costs $60 million that would require shareholders to provide an additional $30 million to invest in. In one year, the project will yield $99 million or $55 million with 50% probability each. If the investment is not made, the firm will file for bankruptcy today. Suppose a 10% discount rate.
The shareholders will _____ the investment because they stand to _____. The investment is _____ for the firm and _____ for the debtholders.
(Ignore taxes and bankruptcy costs)
Group of answer choices
approve; gain $10 million; bad; bad
approve; gain $5.45 million; good; bad
disapprove; lose $10 million; bad; good
disapprove; lose $5.45 million; good; good
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